Table of Contents

** **

 

** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

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** **

**FORM 10-Q**

 

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

# ** **

# **Forthe quarterly period ended February 28, 2009**

** **

## **Commission file number: 33-83868**

** **

**AMERICANCRYSTAL SUGAR COMPANY**

(Exact name ofregistrant as specified in its charter)

** **

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

 

**101 NorthThird Street**

**Moorhead,Minnesota 56560**

(Address ofprincipal executive offices)

** **

**TelephoneNumber (218) 236-4400**

(Registrant’stelephone number, including area code)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months, and (2) has been subject to such filing requirements for the past90 days.

| YES    x |   | NO    o |
|------------------------------|--------|-----------------------------|

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,”“accelerated filer” and “smaller reporting company” in Rule 12b-2 of theExchange 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 markwhether the registrant is a shell company (as defined in rule 12b-2 of theAct).

| YES    o |   | NO    x |
|------------------------------|--------|-----------------------------|

 

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

 
| ** **                     | ** ** | **Outstanding at**     |
|--------------------------------|------------|------------------------|
| **Class of Common Stock** | ** ** | **April 7, 2009** |
| **$10 Par Value**              | ** ** | **2,784**              |

 

 

 

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Table of Contents

** **

**AMERICANCRYSTAL 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 RESULTS OF OPERATIONS AND FINANCIAL CONDITION** | **13**       |
| **ITEM 3.**      | **QUANTITATIVE AND  QUALITATIVE DISCLOSURES ABOUT MARKET RISK**                                 | **20**       |
| **ITEM 4.**      | **CONTROLS AND  PROCEDURES**                                                                    | **20**       |
| ** **       | ** **                                                                                      | ** **   |
| **PART II** | **OTHER INFORMATION**                                                                           | ** **   |
| ** **       | ** **                                                                                      | ** **   |
| **ITEM 1.**      | **LEGAL PROCEEDINGS**                                                                           | **20**       |
| **ITEM 1A.**     | **RISK FACTORS**                                                                                | **21**       |
| **ITEM 2.**      | **UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**                                | **21**       |
| **ITEM 3.**      | **DEFAULTS UPON  SENIOR SECURITIES**                                                            | **21**       |
| **ITEM 4.**      | **SUBMISSION OF  MATTERS TO A VOTE OF SECURITY HOLDERS**                                        | **21**       |
| **ITEM 5.**      | **OTHER INFORMATION**                                                                           | **21**       |
| **ITEM  6.**     | **EXHIBITS**                                                                                    | **22**       |
|             |                                                                                            |         |
| **SIGNATURES**   | ** **                                                                                      | **24**       |

 

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** **

**American Crystal Sugar Company**

**ConsolidatedBalance Sheets**

**(Unaudited)**

**(In Thousands)**

** **

**Assets**

** **
| ** **                                     | ** ** | **February 28** | ** ** | **February 29** | ** ** | **August 31** | ** ** |
|------------------------------------------------|------------|----------------------|------------|----------------------|------------|--------------------|------------|
| ** **                                     | ** ** | **2009**             | ** ** | **2008**             | ** ** | **2008***          | ** ** |
| **Current  Assets:**                           |       |                 |       |                 |       |               |       |
| Cash and Cash  Equivalents                     |       | $                    | 129        |                 | $          | 3,873              |       | $ | 128 |   |
| Receivables:                                   |       |                 |       |                 |       |               |       |
| Trade                                          |       | 51,523               |       | 60,850               |       | 66,149             |       |
| Members                                        |       | 20                   |       | 3                    |       | 2,535              |       |
| Other                                          |       | 5,707                |       | 3,641                |       | 2,767              |       |
| Advances to  Related Parties                   |       | 10,483               |       | 8,967                |       | 20,391             |       |
| Inventories                                    |       | 492,539              |       | 524,438              |       | 188,328            |       |
| Prepaid Expenses                               |       | 1,534                |       | 1,795                |       | 1,163              |       |
|                                           |       |                 |       |                 |       |               |       |
| **Total  Current Assets**                      |       | 561,935              |       | 603,567              |       | 281,461            |       |
|                                           |       |                 |       |                 |       |               |       |
| **Property  and Equipment:**                   |       |                 |       |                 |       |               |       |
| Land and Land  Improvements                    |       | 63,373               |       | 58,246               |       | 60,110             |       |
| Buildings                                      |       | 114,899              |       | 111,183              |       | 112,170            |       |
| Equipment                                      |       | 877,658              |       | 852,107              |       | 877,113            |       |
| Construction in  Progress                      |       | 6,655                |       | 32,337               |       | 5,322              |       |
| Less Accumulated  Depreciation                 |       | (727,404             | )          | (699,281             | )          | (703,134           | )          |
|                                           |       |                 |       |                 |       |               |       |
| **Net  Property and Equipment**                |       | 335,181              |       | 354,592              |       | 351,581            |       |
|                                           |       |                 |       |                 |       |               |       |
| **Net  Property and Equipment Held for Lease** |       | 115,333              |       | 124,995              |       | 120,001            |       |
|                                           |       |                 |       |                 |       |               |       |
| **Other  Assets:**                             |       |                 |       |                 |       |               |       |
| Investments in  CoBank, ACB                    |       | 9,946                |       | 11,627               |       | 9,946              |       |
| Investments in  Marketing Cooperatives         |       | 4,247                |       | 5,781                |       | 4,152              |       |
| Pension Asset                                  |       | 35,456               |       | 37,457               |       | 35,101             |       |
| Other Assets                                   |       | 10,491               |       | 12,252               |       | 11,057             |       |
|                                           |       |                 |       |                 |       |               |       |
| **Total  Other Assets**                        |       | 60,140               |       | 67,117               |       | 60,256             |       |
|                                           |       |                 |       |                 |       |               |       |
| **Total  Assets**                              |       | $                    | 1,072,589  |                 | $          | 1,150,271          |       | $ | 813,299 |   |

 

The Accompanying Notes are an Integral Part of These ConsolidatedFinancial 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** | ** ** | **February 29** | ** ** | **August 31** | ** ** |
|-------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|--------------------|------------|
| ** **                                                  | ** ** | **2009**             | ** ** | **2008**             | ** ** | **2008*******      | ** ** |
| **Current  Liabilities:**                                   |       |                 |       |                 |       |               |       |
| Short-Term Debt                                             |       | $                    | 189,721    |                 | $          | 240,404            |       | $ | 15,297 |   |
| Current  Maturities of Long-Term Debt                       |       | 20,192               |       | 20,977               |       | 20,991             |       |
| Accounts Payable                                            |       | 23,534               |       | 18,306               |       | 35,836             |       |
| Advances Due to  Related Parties                            |       | 1,180                |       | 2,121                |       | 3,343              |       |
| Accrued  Continuing Costs                                   |       | 57,659               |       | 63,248               |       | —             |       |
| Other Current  Liabilities                                  |       | 26,628               |       | 24,217               |       | 27,286             |       |
| Amounts Due  Growers                                        |       | 206,823              |       | 194,114              |       | 120,933            |       |
|                                                        |       |                 |       |                 |       |               |       |
| **Total  Current Liabilities**                              |       | 525,737              |       | 563,387              |       | 223,686            |       |
|                                                        |       |                 |       |                 |       |               |       |
| **Long-Term  Debt, Net of Current Maturities**              |       | 139,372              |       | 157,690              |       | 157,801            |       |
|                                                        |       |                 |       |                 |       |               |       |
| **Accrued  Employee Benefits**                              |       | 34,934               |       | 38,277               |       | 33,805             |       |
|                                                        |       |                 |       |                 |       |               |       |
| **Other  Liabilities**                                      |       | 8,345                |       | 9,053                |       | 6,892              |       |
|                                                        |       |                 |       |                 |       |               |       |
| **Total  Liabilities**                                      |       | 708,388              |       | 768,407              |       | 422,184            |       |
|                                                        |       |                 |       |                 |       |               |       |
| **Commitments  and Contingencies**                          |       |                 |       |                 |       |               |       |
|                                                        |       |                 |       |                 |       |               |       |
| **Minority  Interest in ProGold Limited Liability Company** |       | 56,963               |       | 65,662               |       | 59,839             |       |
|                                                        |       |                 |       |                 |       |               |       |
| **Members’  Investments:**                             |       |                 |       |                 |       |               |       |
| Preferred Stock                                             |       | 38,275               |       | 38,275               |       | 38,275             |       |
| Common Stock                                                |       | 28                   |       | 29                   |       | 28                 |       |
| Additional  Paid-In Capital                                 |       | 152,261              |       | 152,261              |       | 152,261            |       |
| Unit Retains                                                |       | 149,502              |       | 151,386              |       | 174,506            |       |
| Equity Retention                                            |       | 1,153                |       | 1,157                |       | 1,155              |       |
| Accumulated  Other Comprehensive Income (Loss)              |       | (8,603               | )          | (8,519               | )          | (8,984             | )          |
| Retained  Earnings (Accumulated Deficit)                    |       | (25,378              | )          | (18,387              | )          | (25,965            | )          |
|                                                        |       |                 |       |                 |       |               |       |
| **Total  Members’ Investments**                        |       | 307,238              |       | 316,202              |       | 331,276            |       |
|                                                        |       |                 |       |                 |       |               |       |
| **Total  Liabilities and Members’ Investments**        |       | $                    | 1,072,589  |                 | $          | 1,150,271          |       | $ | 813,299 |   |

 

The Accompanying Notes are an Integral Part of These ConsolidatedFinancial Statements.

 

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* Derived from audited financial statements

 

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**American Crystal Sugar Company**

**ConsolidatedStatements of Operations**

**(Unaudited)**

**(In Thousands)**

 
| ** **                                                            | ** ** | **For the Six Months Ended** | ** ** | **For the Three Months Ended** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                            | ** ** | **February 28  2009**                       | ** ** | **February 29  2008**                         | ** ** | **February 28  2009** | ** ** | **February 29  2008** | ** ** |
| **Net  Revenue**                                                      |       | $                                                | 596,644    |                                               | $          | 557,053 |   | $ | 273,556 |   | $ | 252,719 |   |
|                                                                  |       |                                             |       |                                               |       |   |   |   |   |
| **Cost of  Sales**                                                    |       | 75,633                                           |       | 22,608                                             |       | 14,621 |   | 13,782 |   |
|                                                                  |       |                                             |       |                                               |       |   |   |   |   |
| **Gross  Proceeds**                                                   |       | 521,011                                          |       | 534,445                                            |       | 258,935 |   | 238,937 |   |
|                                                                  |       |                                             |       |                                               |       |   |   |   |   |
| **Selling,  General and Administrative Expenses**                     |       | 124,026                                          |       | 119,748                                            |       | 55,620 |   | 56,716 |   |
| **Accrued  Continuing Costs**                                         |       | 57,659                                           |       | 63,248                                             |       | 15,293 |   | 21,154 |   |
|                                                                  |       |                                             |       |                                               |       |   |   |   |   |
| **Operating  Proceeds**                                               |       | 339,326                                          |       | 351,449                                            |       | 188,022 |   | 161,067 |   |
|                                                                  |       |                                             |       |                                               |       |   |   |   |   |
| **Other  Income (Expense):**                                          |       |                                             |       |                                               |       |   |   |   |   |
| Interest Income                                                       |       | 103                                              |       | 336                                                |       | 4 |   | 22 |   |
| Interest  Expense, Net                                                |       | (5,330                                           | )          | (7,922                                             | )          | (2,913 | ) | (5,269 | ) |
| Other, Net                                                            |       | 4,489                                            |       | 623                                                |       | (318 | ) | 110 |   |
|                                                                  |       |                                             |       |                                               |       |   |   |   |   |
| **Total  Other (Expense)**                                            |       | (738                                             | )          | (6,963                                             | )          | (3,227 | ) | (5,137 | ) |
|                                                                  |       |                                             |       |                                               |       |   |   |   |   |
| **Proceeds  Before Minority Interest and Income Tax Expense**         |       | 338,588                                          |       | 344,486                                            |       | 184,795 |   | 155,930 |   |
|                                                                  |       |                                             |       |                                               |       |   |   |   |   |
| **Minority  Interest**                                                |       | (3,059                                           | )          | (3,927                                             | )          | (1,388 | ) | (1,427 | ) |
|                                                                  |       |                                             |       |                                               |       |   |   |   |   |
| **Income  Tax Expense**                                               |       | (568                                             | )          | (1,943                                             | )          | (374 | ) | (772 | ) |
|                                                                  |       |                                             |       |                                               |       |   |   |   |   |
| **Net  Proceeds Resulting from Member and Non-Member Business**       |       | $                                                | 334,961    |                                               | $          | 338,616 |   | $ | 183,033 |   | $ | 153,731 |   |
|                                                                  |       |                                             |       |                                               |       |   |   |   |   |
| **Distributions  of Net Proceeds:**                                   |       |                                             |       |                                               |       |   |   |   |   |
| Credited/(Charged)  to Members’ Investments:                     |       |                                             |       |                                               |       |   |   |   |   |
| Non-Member  Business Income                                           |       | $                                                | 814        |                                               | $          | 2,791 |   | $ | 535 |   | $ | 1,106 |   |
| Unit Retains  Declared to Members                                     |       | —                                           |       | —                                             |       | — |   | — |   |
| Net Credit to  Members’ Investments                              |       | 814                                              |       | 2,791                                              |       | 535 |   | 1,106 |   |
| Payments To/Due  Members for Sugarbeets, Net of Unit Retains Declared |       | 334,147                                          |       | 335,825                                            |       | 182,498 |   | 152,625 |   |
| **Total**                                                             |       | $                                                | 334,961    |                                               | $          | 338,616 |   | $ | 183,033 |   | $ | 153,731 |   |

 

The Accompanying Notes are an Integral Part of These ConsolidatedFinancial Statements.

 

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** **

**American Crystal Sugar Company**

**ConsolidatedStatements of Cash Flows**

**(Unaudited)**

**(In Thousands)**

 
| ** **                                                            | ** ** | **For the Six Months Ended** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                            | ** ** | **February 28  2009**                       | ** ** | **February 29  2008** | ** ** |
| **Cash  Provided By (Used In) Operating Activities:**                 | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Net Proceeds  Resulting from Member and Non-Member Business           |       | $                                                | 334,961    |   | $ | 338,616 |   |
| Payments To/Due  Members for Sugarbeets, Net of Unit Retains Declared |       | (334,147                                         | )          | (335,825 | ) |
| Add (Deduct)  Non-Cash Items:                                         |       |                                             |       |   |   |
| Depreciation and  Amortization                                        |       | 35,274                                           |       | 36,015 |   |
| Income from  Equity Method Investees                                  |       | (10                                              | )          | (24 | ) |
| Loss on the  Disposition of Property and Equipment                    |       | 494                                              |       | 21 |   |
| Deferred Gain  Recognition                                            |       | (54                                              | )          | (99 | ) |
| Minority  Interest Gain                                               |       | 3,059                                            |       | 3,927 |   |
| Changes in  Assets and Liabilities:                                   |       |                                             |       |   |   |
| Receivables                                                           |       | 14,201                                           |       | 20,794 |   |
| Inventories                                                           |       | (304,211                                         | )          | (307,875 | ) |
| Prepaid Expenses                                                      |       | (372                                             | )          | (559 | ) |
| Non Current  Pension Asset                                            |       | 315                                              |       | (57 | ) |
| Advances To/Due  to Related Parties                                   |       | 7,745                                            |       | (1,924 | ) |
| Accounts Payable                                                      |       | (12,302                                          | )          | (20,692 | ) |
| Accrued  Continuing Costs                                             |       | 57,659                                           |       | 63,248 |   |
| Other  Liabilities                                                    |       | 1,377                                            |       | (8,835 | ) |
| Amounts Due  Growers                                                  |       | 85,891                                           |       | 50,854 |   |
| **Net  Cash Used In Operating Activities**                            |       | (110,120                                         | )          | (162,415 | ) |
|                                                                  |       |                                             |       |   |   |
| **Cash  Provided By (Used In) Investing Activities:**                 |       |                                             |       |   |   |
| Purchases of  Property and Equipment                                  |       | (13,161                                          | )          | (19,796 | ) |
| Purchases of  Property and Equipment Held for Lease                   |       | (1,057                                           | )          | (757 | ) |
| Proceeds from  the Sale of Property and Equipment                     |       | 6                                                |       | 29 |   |
| Changes in Other  Assets                                              |       | 78                                               |       | 2,207 |   |
| **Net  Cash Used In Investing Activities**                            |       | (14,134                                          | )          | (18,317 | ) |
|                                                                  |       |                                             |       |   |   |
| **Cash  Provided By (Used In) Financing Activities:**                 |       |                                             |       |   |   |
| Net Proceeds  from Short-Term Debt                                    |       | 174,424                                          |       | 215,424 |   |
| Proceeds from  Issuance of Long-Term Debt                             |       | 34,350                                           |       | 19,183 |   |
| Long-Term Debt  Repayment                                             |       | (53,578                                          | )          | (29,717 | ) |
| Distributions to  Minority Interest                                   |       | (5,935                                           | )          | — |   |
| Payment of Unit  Retains and Equity Retention                         |       | (25,006                                          | )          | (20,507 | ) |
| **Net  Cash Provided By Financing Activities**                        |       | 124,255                                          |       | 184,383 |   |
| **Increase  In Cash and Cash Equivalents**                            |       | 1                                                |       | 3,651 |   |
| **Cash  and Cash Equivalents, Beginning of Year**                     |       | 128                                              |       | 222 |   |
|                                                                  |       |                                             |       |   |   |
| **Cash  and Cash Equivalents, End of Period**                         |       | $                                                | 129        |   | $ | 3,873 |   |

 

The Accompanying Notes are an Integral Part of These ConsolidatedFinancial Statements.

 

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# **Table ofContents**

 

# **AMERICANCRYSTAL SUGAR COMPANY**

**NOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTS**

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

**February 28, 2009 and February 29, 2008**

**(Unaudited)**

 

 

**Note1:  Basis of Presentation**

 

Theunaudited consolidated financial statements of American Crystal Sugar Company(the Company) contained herein have been prepared pursuant to the rules andregulations of the Securities and Exchange Commission.  Accordingly, they do not include all theinformation and footnotes required by accounting principles generally acceptedin the United States of America. However, in the opinion of management, all adjustments, consisting ofnormal recurring accruals, considered necessary for a fair presentation havebeen included.  These financialstatements should be read in conjunction with the consolidated financialstatements and notes included in the Company’s Annual Report on Form 10-Kfor the year ended August 31, 2008.

 

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

 

Theoperating results for the six months ended February 28, 2009, are notnecessarily indicative of the results that may be expected for the year ended August 31,2009.  The amount paid to shareholdersfor sugarbeets (member beet payment) depends on the future selling prices ofsugar and agri-products as well as processing and other costs incurred duringthe remainder of the fiscal year associated with the 2008 Red River Valleysugarbeet crop (RRV crop).  The amountpaid to non-member growers for sugarbeets (non-member beet payment) depends onthe future selling prices of sugar and the related selling expenses associatedwith the 2008 Sidney Sugars sugarbeet crop (Sidney crop).  For the purposes of this report, the amountof the beet payments, future revenues and costs have been estimated.  Therefore, adjustments with respect to theseestimates may be necessary in the future, as additional information becomesavailable.

 

**Note 2: Recently IssuedAccounting Pronouncements**

 

TheFinancial Accounting Standards Board (FASB) has issued Statement No. 157, *Fair Value Measurements*(SFAS 157).  This statement defines fair value,establishes a framework for measuring fair value in accordance with generallyaccepted accounting principles (GAAP), and expands disclosures about fair valuemeasurements.  This statement becameeffective for the Company in the first quarter of fiscal 2009.  Relative to SFAS 157, the FASB issued FASBStaff Positions (FSP) 157-1, 157-2 and 157-3. FSP 157-1 amends SFAS 157 toexclude SFAS No. 13, *Accounting for Leases*,and its related interpretive accounting pronouncements that address leasingtransactions, while FSP 157-2 delays the effective date of the application ofSFAS 157 for the Company to the first quarter of fiscal 2010 for allnon-financial assets and non-financial liabilities that are recognized ordisclosed at fair value in the financial statements on a nonrecurringbasis.  FSP 157-3 became effective October 10,2008 for determining the fair value of a financial asset when the market forthat asset is not active.  The Companydoes not expect that the adoption of this statement will have a material effecton the Company’s financial statements.

 

TheFASB has issued Statement No. 158, *Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans—an amendment of FASBStatements No. 87, 88, 106, and 132(R)*.  This statement requires the Company torecognize the over-funded or under-funded status of a defined benefitpostretirement plan as an asset or liability in its statement of financialposition and to recognize changes in that funded status in the year in which thechanges occur through comprehensive income. This requirement became effective and was adopted by the Company as of August 31,2007.  This statement 

 

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alsorequires the Company in this fiscal year to change the annual measurement dateof the funded status of the plans from May 31 to August 31, the dateof its year-end statement of financial position.

 

TheFASB has issued Statement No. 160, *Noncontrolling Interestsin Consolidated Financial Statements — an amendment of ARB No. 51*.  This statement requires all entities toreport noncontrolling (minority) interests in subsidiaries as equity in theconsolidated financial statements*.*  Itsintention is to eliminate the diversity in practice regarding the accountingfor transactions between an entity and noncontrolling interests.  This statement becomes effective forthe Company in the first quarter of fiscal 2010.  At that time, the Company will be required toreport the minority interest in ProGold as a component of equity.

 

TheFASB has issued Statement No. 161, *Disclosures aboutDerivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133*.  This statement enhances the disclosurerequirements for derivatives and hedging activities.  This statement became effective for theCompany in the second quarter of fiscal 2009.

 

TheFASB has issued statement No. 141R, *Business Combinations.*  This statement replaces FASB Statement No. 141,*Business Combinations. *This Statement retains thefundamental requirements in Statement 141 that the acquisition method ofaccounting (which Statement 141 called the *purchasemethod*) be used for all business combinations and for an acquirer tobe identified for each business combination. This Statement defines the acquirer as the entity that obtains controlof one or more businesses in the business combination and establishes the acquisitiondate as the date that the acquirer achieves control.  The FASB also released FSP No. FAS141(R)-1,*Accounting for Assets Acquired andLiabilities Assumed in a Business Combination That Arise from Contingencies,*to address some of the application issues under SFAS No. 141(R) *Business Combinations*. FSP No. FAS141(R)-1 deals with the initial recognition and measurement of an assetacquired or a liability assumed in a business combination that arises from acontingency provided the asset or liability’s fair value on the date ofacquisition can be determined. When the fair value can’t be determined, the FSPrequires using the guidance under SFAS No. 5,*Accounting for Contingencies* and FASB Interpretation (FIN) No. 14,*Reasonable Estimation of the Amount of a Loss*.These statements become effective for the Company in fiscal 2010.  The Company does not expect that the adoptionof these statements will have a material effect on the Company’s financialstatements.

 

TheFASB has issued FSP FAS 142-3, *Determination of theUseful Life of Intangible Assets. *ThisFSP amends the factors that should be considered in developing renewal orextension assumptions used to determine the useful life of a recognizedintangible asset under FASB Statement No. 142, *Goodwill and Other Intangible Assets*.  The intent of this FSP is to improve theconsistency between the useful life of a recognized intangible asset underStatement 142 and the period of expected cash flows used to measure the fairvalue of the asset under FASB Statement No. 141 (revised 2007), *Business Combinations,*and other U.S.generally accepted accounting principles (GAAP).  This FSP becomes effective for the Company inFiscal 2010.  The Company does not expectthat the adoption of this FSP will have a material effect on the Company’sfinancial statements.

 

TheFASB has issued FSP FAS 140-4 and FIN 46(R)-8 *Disclosuresby Public Entities (Enterprises) about Transfers of Financial Assets andInterests in Variable Interest Entities.*  This FSP amends FASB Statement No. 140, *Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities,* to require public entities toprovide additional disclosures about transfers of financial assets.  It also amends FASB Interpretation No. 46(revised December 2003),*****Consolidation of Variable Interest Entities,* to requirepublic enterprises, including sponsors that have a variable interest in avariable interest entity, to provide additional disclosures about theirinvolvement with variable interest entities. * *This FSP became effective for theCompany in the second quarter of Fiscal 2009.

 

TheFASB has issued FSP FAS 132(R)-1 *Employers’ Disclosuresabout Postretirement Benefit Plan Assets.*  This FSP amends FASB Statement No. 132(revised 2003), *Employers’ Disclosures about Pensions andOther Postretirement Benefits,* to provide guidance on an employer’sdisclosure about plan assets of a defined benefit pension plan or otherpostretirement plan.  This FSP becomeseffective for the 

 

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Companyin Fiscal 2010.  The Company does notexpect that the adoption of this FSP will have a material effect on the Company’sfinancial statements.

 

**Note3:  Inventories**

 

Themajor components of inventories are as follows (In Thousands):

 
| ** **                                                             | ** ** | **February 28** | ** ** | **February 29** | ** ** | **August 31** | ** ** |
|------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|--------------------|------------|
| ** **                                                             | ** ** | **2009**             | ** ** | **2008**             | ** ** | **2008**           | ** ** |
| Refined Sugar,  Pulp, Molasses, Other Agri-Products and Sugarbeet Seed |       | $                    | 304,794    |                 | $          | 355,985            |       | $ | 151,741 |   |
| Unprocessed  Sugarbeets                                                |       | 152,255              |       | 141,394              |       | —             |       |
| Maintenance  Parts and Supplies                                        |       | 35,490               |       | 27,059               |       | 36,587             |       |
|                                                                   |       |                 |       |                 |       |               |       |
| Total  Inventories                                                     |       | $                    | 492,539    |                 | $          | 524,438            |       | $ | 188,328 |   |

 

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

 

# **Note 4: Short-Term Debt**

 

The Company has a seasonal line of credit with a consortium of lendersled by CoBank, ACB through August 1, 2010, of $345.0 million and aline of credit with Wells Fargo Bank for $1 million.  The Company’s commercial paper programprovides short-term borrowings of up to $325 million.  Any borrowingsunder the commercial paper program along with outstanding short-term letters ofcredit will act to reduce the available credit under the CoBank, ACB seasonalline of credit by a commensurate amount. The Company also utilizes the Commodity Credit Corporation (CCC) to meetits short-term borrowing needs.

 

As of February 28,2009, the Company had outstanding commercial paper of $58.3****millionat an average interest rate of 1.45% and maturity dates between March 5,2009 and March 17, 2009.  Inaddition, the Company had outstanding non-recourse loans with the CCC of $96.4million, against which 4.2 million hundredweight of sugar was pledged ascollateral.  The CCC loans carried aninterest rate of 1.63% and maturity dates of August 31, 2009 and September 30,2009.  The Company also had outstandingshort-term debt with CoBank, ACB as of February 28, 2009 of $35.0 millionat an interest rate of 1.25% and a maturity date of March 19, 2009.  The Company had $2.2 million of short-termletters of credit outstanding as of February 28, 2009.  The unused seasonal line of credit as of February 28,2009 was $250.5 million.

 

As of February 29,2008, the Company had outstanding commercial paper of $206.1****million at an average interest rate of 5.14% and maturitydates between March 3, 2008 and April 30, 2008.  In addition, the Company had an outstandingnon-recourse loan with the CCC of $34.3 million, against which 1.5 millionhundredweight of sugar was pledged as collateral.  The CCC loan carried an interest rate of4.25% and a maturity date of September 30, 2008.  The Company had no outstanding short-termdebt with CoBank, ACB as of February 29, 2008.  The Company had $2.1 million of short-termletters of credit outstanding as of February 29, 2008.  The unused seasonal line of credit as of February 29,2008 was $182.8 million.

 

**Note5:  Long-Term Debt**

 

As of February 28,2009, the Company had long-term debt availability with CoBank, ACB of****$174.7 million, of which $36.3 million in loans and$70.2 million in long-term letters of credit were outstanding.  The unused long-term line of credit as of February 28, 2009, was $68.2million.  In addition, the Company hadlong-term debt outstanding, as of February 28, 2009, of $50.0 million froma private placement of Senior Notes that occurred in September of 1998;$2.9 million from a private placement of Senior Notes that occurred in January of2003; and $70.4 million from seven separate issuances of Pollution Controland Industrial Development Revenue Bonds.

 

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As of February 29, 2008, the Company had $55.3 million in loansoutstanding with CoBank, ACB and $69.5 million in long-term letters of creditoutstanding.  In addition, the Companyhad long-term debt outstanding, as of February 29, 2008, of$50 million from a private placement of Senior Notes that occurred in September of1998; $5.5 million from a private placement of Senior Notes that occurred in January of2003; $67.1 million from ten separate issuances of Pollution Control andIndustrial Development Revenue Bonds; and a term loan with Bank of North Dakotaof $ .8 million.

 

**Note6:  Interest Paid and InterestCapitalized**

 

Interestpaid, net of amounts capitalized, was $5.2 million and $7.4 million for the sixmonths ended February 28, 2009 and February 29, 2008, respectivelyand $4.1 million and $6.3 million for the three months ended February 28,2009 and February 29, 2008, respectively.  Interest capitalized was $ .4 million and $ .7million for the six months ended February 28, 2009 and February 29,2008, respectively and $ .2 million and $ .3 million for the three months endedFebruary 28, 2009 and February 29, 2008, respectively.

 

**Note7:  Accrued Continuing Costs**

 

For interimreporting, the net proceeds from member business is based on the forecastedgross beet payment and the percentage of the tons of sugarbeets processed tothe total estimated tons of sugarbeets to process for a given crop year.  The net proceeds from the operations ofSidney Sugars is based on the forecasted net income for the fiscal year and thepercentage of the tons of non-member sugarbeets processed to the totalestimated tons of non-member sugarbeets to process for a given fiscal year.

 

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

 

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**Note8: ****Net Periodic Pension and Post-Retirement Costs**

 

The following schedules provide the components of theNet Periodic Pension and Post-Retirement Costs for the six months and threemonths ended February 28, 2009 and February 29, 2008:

 

***Components of Net Periodic PensionCost***

(In Thousands)

 
| ** **                           | ** ** | **For the Six Months Ended** | ** ** | **For the Three Months Ended** | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                           | ** ** | **February 28  2009**                       | ** ** | **February 29  2008**                         | ** ** | **February 28  2009** | ** ** | **February 29  2008** | ** ** |
| Service Cost                         |       | $                                                | 2,099      |                                               | $          | 1,882 |   | $ | 1,049 |   | $ | 941 |   |
| Interest Cost                        |       | 5,337                                            |       | 4,076                                              |       | 2,668 |   | 2,038 |   |
| Expected Return  on Plan Assets      |       | (7,729                                           | )          | (6,483                                             | )          | (3,864 | ) | (3,241 | ) |
| Amortization of  Prior Service Costs |       | 822                                              |       | 659                                                |       | 411 |   | — |   |
| Amortization of  Net Actuarial Loss  |       | 35                                               |       | 30                                                 |       | 18 |   | 329 |   |
| FAS 158  Measurement Date Adjustment |       | (113                                             | )          | —                                             |       | (56 | ) | 15 |   |
| Net Periodic  Pension Cost           |       | $                                                | 451        |                                               | $          | 164 |   | $ | 226 |   | $ | 82 |   |

 

***Components of Net PeriodicPost-Retirement Cost***

(In Thousands)

 
| ** **                          | ** ** | **For the Six Months Ended** | ** ** | **For the Three Months Ended** | ** ** |
|-------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                          | ** ** | **February 28  2009**                       | ** ** | **February 29  2008**                         | ** ** | **February 28  2009** | ** ** | **February 29  2008** | ** ** |
| Service Cost                        |       | $                                                | 484        |                                               | $          | 538 |   | $ | 242 |   | $ | 269 |   |
| Interest Cost                       |       | 944                                              |       | 932                                                |       | 472 |   | 466 |   |
| Amortization of  Net Actuarial Gain |       | (338                                             | )          | (112                                               | )          | (169 | ) | (56 | ) |
| Net Periodic  Post-Retirement Cost  |       | $                                                | 1,090      |                                               | $          | 1,358 |   | $ | 545 |   | $ | 679 |   |

 

Inaccordance with Statement No. 158, *Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans—an amendment of FASBStatements No. 87, 88, 106, and 132(R) *which requires theCompany in fiscal 2009 to change the annual measurement date of the fundedstatus of the pension plans from May 31 to August 31, the Company hasrecorded a direct charge of approximately $225,000 to retained earningsrepresenting a measurement date adjustment of 3/15ths of the pension cost forthe period of June 1, 2008 to August 31, 2009.  The remaining 12/15ths of this pension costwill be expensed and recognized during fiscal 2009.

 

TheCompany is anticipating making contributions to the pension plans ofapproximately $5 million to $10 million during this fiscal year.  As of February 28, 2009, nocontributions to the pension plans have been made for this fiscal year.  The Company has contributed and made benefitpayments of approximately $66,000 related to the Supplemental ExecutiveRetirement Plans during the six months ended February 28, 2009.  The Company expects to contribute and makebenefit payments of approximately $124,000 this fiscal year related to theSupplemental Executive Retirement Plans.

 

TheCompany has contributed and made benefit payments of approximately $454,000 related to the post-retirement plans duringthe six months ended February 28, 2009. The Company expects to contributeand make benefit payments of approximately $1.0 million related to thepost-retirement plans during the current fiscal year.

 

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** **

**Note9:  Members’ Investments**

 
| ** **              | ** ** | **Par Value** | ** ** | **Shares  Authorized** | ** ** | **Shares Issued  & Outstanding** | ** ** |
|-------------------------|------------|--------------------|------------|------------------------|------------|------------------------------------------------|------------|
| Preferred Stock:   | ** ** | ** **         | ** ** | ** **             | ** ** | ** **                                     | ** ** |
| April 7,  2009     |       | $                  | 76.77      |                   | 600,000    |                                           | 498,570    |   |
| February 28,  2009 |       | $                  | 76.77      |                   | 600,000    |                                           | 498,570    |   |
| August 31,  2008   |       | $                  | 76.77      |                   | 600,000    |                                           | 498,570    |   |
| February 29,  2008 |       | $                  | 76.77      |                   | 600,000    |                                           | 498,570    |   |
|                    |       |               |       |                   |       |                                           |       |
| Common Stock:           |       |               |       |                   |       |                                           |       |
| April 7,  2009     |       | $                  | 10.00      |                   | 4,000      |                                           | 2,784      |   |
| February 28,  2009 |       | $                  | 10.00      |                   | 4,000      |                                           | 2,803      |   |
| August 31,  2008   |       | $                  | 10.00      |                   | 4,000      |                                           | 2,839      |   |
| February 29,  2008 |       | $                  | 10.00      |                   | 4,000      |                                           | 2,878      |   |

** **

**Note 10:Shipping and Handling Costs**

 

The costs incurred for the shipping and handling of products sold areclassified in the financial statements as a selling expense on the Statementsof Operations.  Shipping and handlingcosts were $82.7 million and $82.2 million for the six months ended February 28,2009 and February 29, 2008, respectively and $35.2 million and $38.9million for the three months ended February 28, 2009 and February 29,2008, respectively.

** **

**Note 11:Segment Reporting**

** **

The Company hasidentified two reportable segments: Sugar and Leasing.  The sugar segment is engaged primarily in theproduction and marketing of sugar from sugarbeets.  It also sells agri-products and sugarbeetseed.  The leasing segment is engaged inthe leasing of a corn wet-milling plant used in the production of high-fructosecorn syrup sweetener.  The segments aremanaged separately.  There are nointer-segment sales.  The leasing segmenthas a major customer that accounts for all of that segment’s revenue.

 

Summarizedfinancial information concerning the Company’s reportable segments for the sixmonths and three months ended February 28, 2009 and February 29, 2008, is shown below:

 
| ** **                           | ** ** | **For the Six Months Ended February 28, 2009** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                           | ** ** | **(Dollars In Thousands)**                                              | ** ** |
| ** **                           | ** ** | **Sugar**                                                                         | ** ** | **Leasing** | ** ** | **Consolidated** | ** ** |
| Net Revenue from  External Customers |       | $                                                                                 | 584,637    |   | $ | 12,007 |   | $ | 596,644 |   |
| Gross Proceeds                       |       | $                                                                                 | 514,589    |   | $ | 6,422 |   | $ | 521,011 |   |
| Depreciation and  Amortization       |       | $                                                                                 | 29,689     |   | $ | 5,585 |   | $ | 35,274 |   |
| Interest Income                      |       | $                                                                                 | 102        |   | $ | 1 |   | $ | 103 |   |
| Interest Expense                     |       | $                                                                                 | 5,330      |   | $ | — |   | $ | 5,330 |   |
| Income from  Equity Method Investees |       | $                                                                                 | 10         |   | $ | — |   | $ | 10 |   |
| Other  Income/(Expense), Net         |       | $                                                                                 | 4,619      |   | $ | (140 | ) | $ | 4,479 |   |
| Net Proceeds                         |       | $                                                                                 | 331,777    |   | $ | 3,184 |   | $ | 334,961 |   |
|                                 |       |                                                                              |       |   |   |   |   |
| Capital  Expenditures                |       | $                                                                                 | 13,161     |   | $ | 1,057 |   | $ | 14,218 |   |

 

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| ** **                           | ** ** | **For the Six Months Ended February 29, 2008** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                           | ** ** | **(Dollars In Thousands)**                                              | ** ** |
| ** **                           | ** ** | **Sugar**                                                                         | ** ** | **Leasing** | ** ** | **Consolidated** | ** ** |
| Net Revenue from  External Customers |       | $                                                                                 | 544,407    |   | $ | 12,646 |   | $ | 557,053 |   |
| Gross Proceeds                       |       | $                                                                                 | 526,094    |   | $ | 8,351 |   | $ | 534,445 |   |
| Depreciation and  Amortization       |       | $                                                                                 | 30,458     |   | $ | 5,557 |   | $ | 36,015 |   |
| Interest Income                      |       | $                                                                                 | 316        |   | $ | 20 |   | $ | 336 |   |
| Interest Expense                     |       | $                                                                                 | 7,632      |   | $ | 290 |   | $ | 7,922 |   |
| Income from  Equity Method Investees |       | $                                                                                 | 24         |   | $ | — |   | $ | 24 |   |
| Other  Income/(Expense), Net         |       | $                                                                                 | 599        |   | $ | — |   | $ | 599 |   |
| Net Proceeds                         |       | $                                                                                 | 334,529    |   | $ | 4,087 |   | $ | 338,616 |   |
|                                 |       |                                                                              |       |   |   |   |   |
| Capital  Expenditures                |       | $                                                                                 | 19,796     |   | $ | 757 |   | $ | 20,553 |   |

** **
| ** **                           | ** ** | **For the Three Months Ended February 28, 2009** | ** ** |
|--------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                           | ** ** | **(Dollars In Thousands)**                                                | ** ** |
| ** **                           | ** ** | **Sugar**                                                                           | ** ** | **Leasing** | ** ** | **Consolidated** | ** ** |
| Net Revenue from  External Customers |       | $                                                                                   | 267,774    |   | $ | 5,782 |   | $ | 273,556 |   |
| Gross Proceeds                       |       | $                                                                                   | 255,944    |   | $ | 2,991 |   | $ | 258,935 |   |
| Depreciation and  Amortization       |       | $                                                                                   | 14,731     |   | $ | 2,791 |   | $ | 17,522 |   |
| Interest Income                      |       | $                                                                                   | 4          |   | $ | — |   | $ | 4 |   |
| Interest Expense                     |       | $                                                                                   | 2,913      |   | $ | — |   | $ | 2,913 |   |
| Income from  Equity Method Investees |       | $                                                                                   | 5          |   | $ | — |   | $ | 5 |   |
| Other  Income/(Expense), Net         |       | $                                                                                   | (183       | ) | $ | (140 | ) | $ | (323 | ) |
| Net Proceeds                         |       | $                                                                                   | 181,588    |   | $ | 1,445 |   | $ | 183,033 |   |
|                                 |       |                                                                                |       |   |   |   |   |
| Capital  Expenditures                |       | $                                                                                   | 8,292      |   | $ | 307 |   | $ | 8,599 |   |

** **
| ** **                           | ** ** | **For the Three Months Ended February 29, 2008** | ** ** |
|--------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                           | ** ** | **(Dollars In Thousands)**                                                | ** ** |
| ** **                           | ** ** | **Sugar**                                                                           | ** ** | **Leasing** | ** ** | **Consolidated** | ** ** |
| Net Revenue from  External Customers |       | $                                                                                   | 246,902    |   | $ | 5,817 |   | $ | 252,719 |   |
| Gross Proceeds                       |       | $                                                                                   | 235,898    |   | $ | 3,039 |   | $ | 238,937 |   |
| Depreciation and  Amortization       |       | $                                                                                   | 15,279     |   | $ | 2,778 |   | $ | 18,057 |   |
| Interest Income                      |       | $                                                                                   | 8          |   | $ | 14 |   | $ | 22 |   |
| Interest Expense                     |       | $                                                                                   | 5,153      |   | $ | 116 |   | $ | 5,269 |   |
| Income from  Equity Method Investees |       | $                                                                                   | 10         |   | $ | — |   | $ | 10 |   |
| Other  Income/(Expense), Net         |       | $                                                                                   | 100        |   | $ | — |   | $ | 100 |   |
| Net Proceeds                         |       | $                                                                                   | 152,246    |   | $ | 1,485 |   | $ | 153,731 |   |
|                                 |       |                                                                                |       |   |   |   |   |
| Capital Expenditures                 |       | $                                                                                   | 10,686     |   | $ | 107 |   | $ | 10,793 |   |

 

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| ** **                   | ** ** | **As of February 28, 2009** | ** ** |
|------------------------------|------------|-------------------------------------------------|------------|
| ** **                   | ** ** | **(Dollars In Thousands)**            | ** ** |
| ** **                   | ** ** | **Sugar**                                       | ** ** | **Leasing** | ** ** | **Consolidated** | ** ** |
| Property and  Equipment, Net |       | $                                               | 335,181    |   | $ | — |   | $ | 335,181 |   |
| Assets Held for  Lease, Net  |       | $                                               | —     |   | $ | 115,333 |   | $ | 115,333 |   |
| Segment Assets               |       | $                                               | 952,803    |   | $ | 119,786 |   | $ | 1,072,589 |   |

 
| ** **                   | ** ** | **As of February 29, 2008** | ** ** |
|------------------------------|------------|-------------------------------------------------|------------|
| ** **                   | ** ** | **(Dollars In Thousands)**            | ** ** |
| ** **                   | ** ** | **Sugar**                                       | ** ** | **Leasing** | ** ** | **Consolidated** | ** ** |
| Property and  Equipment, Net |       | $                                               | 354,592    |   | $ | — |   | $ | 354,592 |   |
| Assets Held for  Lease, Net  |       | $                                               | —     |   | $ | 124,995 |   | $ | 124,995 |   |
| Segment Assets               |       | $                                               | 1,015,666  |   | $ | 134,605 |   | $ | 1,150,271 |   |

** **

**Note 12:Environmental Matters**

** **

TheCompany is subject to extensive federal and state environmental laws andregulations with respect to water and air quality, solid waste disposal andodor and noise control.  The Companyconducts an ongoing compliance program designed to meet these environmentallaws and regulations.  The Companybelieves that it is in substantial compliance with applicable environmentallaws and regulations.  From time to time,however, the Company may be involved in investigations or determinationsregarding non-material matters that may arise.

 

TheCompany’s sugar manufacturing process is energy intensive and generates carbondioxide and other “Greenhouse Gases” (GHGs). Several bills have been introduced in the United States Senate and Houseof Representatives that would regulate GHGs and carbon dioxide emissions toreduce 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 regulationunder climate change policies in the relatively near future.  These policies, if adopted, will increase theCompany’s energy and other operating costs. Depending on how these policies address imports, the domestic market mayhave a competitive disadvantage with imported products.  These policies could have a significantnegative impact on the Company’s beet payment to shareholders if we are notable to pass the increased costs on to the Company’s customers****.****

 

OnNovember 25, 2008, the Company entered into a stipulation agreement withthe Minnesota Pollution Control Agency (MPCA) related to hydrogen sulfideemissions from its Crookston, East Grand Forks and Moorhead, Minnesotafactories.  As part of the stipulationagreement, the Company has agreed to make certain capital expenditures over thenext three years and implement specified changes in operating procedures tocontain hydrogen sulfide emissions at the Minnesota factories.  The required capital expenditures arecurrently estimated to be approximately $12 million.  The costs associated with operational changesare not currently known.

 

TheCompany works closely with all affected government agencies to resolveenvironmental issues that arise and believes they will be resolved without anyadverse effect on the Company.

 

TheCompany has identified capital expenditures for environmental related projectsover the next three years at the Company’s factory locations of approximately$26.0 million.

 

**Note 13:Legal Matters**

** **

OnFebruary 11, 2009, the Ninth Circuit Court of Appeals (the Court) issuedits decision in the case of *Amalgamated Sugar Co, LLCv. Thomas Vilsack; Department of Agriculture*, a case that involvedAmalgamated Sugar’s challenge of a decision by the United States Department ofAgriculture (USDA) to transfer certain sugar marketing allocations to theCompany.  The Court reversed the lowercourt’s decision which confirmed the USDA’s transfer of the marketingallocations, and remanded the case back to the lower court for furtheraction.  The Company has appealed theCourt’s decision to protect the

 

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Company’sinterests in the marketing allocations. If the Court’s decision is implemented as it currently stands, theCompany would experience a net reduction of marketing allocations ofapproximately 1 million CWT.  The Companydoes not believe that any future loss of these marketing allocations will havea material impact on the Company’s planted acres going forward, assumingaverage crop yield, crop quality and continued domestic consumption trends.

 

**Item 2.   Management’sDiscussion and Analysis of Results of Operations and Financial Condition forthe Six Months and Three Months Ended February 28, 2009 and February 29,2008**

 

This reportcontains 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.  TheCompany’s actual results could differ materially from those indicated.  Risk factors that could cause or contributeto such differences include, without limitation, market factors, weather andgeneral economic conditions, farm and trade policy, and available quantity andquality of sugarbeets.  For a morecomplete discussion of “Risk Factors”, please refer to the Company’s 2008 Form 10-K.

** **

**Overview**

 

The harvest of the Red River Valley and Sidney sugarbeet crops grownduring 2008 and to be processed during fiscal 2009 produced a total of10.7 million tons of sugarbeets, or approximately 25.4 tons of sugarbeetsper acre from approximately 422,000 acres. This represents a decrease in total tons harvested of approximately 14.1percent compared to the 2007 crop.  Thesugar content of the 2008 crop is 17.6 percent as compared to the 18.1 percentsugar content of the 2007 crop.  TheCompany expects to produce a total of approximately 30.2 millionhundredweight of sugar from the 2008 crop, a decrease of approximately 17.4percent compared to the 2007 crop.

 

Net Proceeds from Member and Non-Member Business for fiscal 2009 areexpected to be approximately 10 percent lower than in fiscal 2008.  This decrease is primarily due to fewer tonsharvested and a decline in the sugar content of the sugarbeets resulting in thedecreased production of sugar and agri-products. This decrease is partiallyoffset by anticipated higher net selling prices for sugar and agri-products.

 

**Comparisonof the Six Months Ended February 28, 2009 and February 29, 2008**

** **

Revenuefor the six months ended February 28, 2009, was $596.6 million, anincrease of $39.6 million from the six months ended February 29,2008.  The table below reflects thepercentage changes in product revenues, prices and volumes for the six monthsended February 28, 2009, as compared to the six months ended February 29,2008.

 
| **Product** | ** ** | **Revenue** | ** ** | **Selling Price** | ** ** | **Volume** | ** ** |
|-------------|------------|-------------|------------|------------------------|------------|------------|------------|
| Sugar       |       | 7.4         | %          | 6.7                    | %          | 0.7        | %          |
| Pulp        |       | 12.5        | %          | 46.6                   | %          | -23.2      | %          |
| Molasses    |       | -53.5       | %          | 15.2                   | %          | -59.7      | %          |
| CSB         |       | 18.9        | %          | 22.7                   | %          | -3.1       | %          |
| Betaine     |       | 7.9         | %          | 23.8                   | %          | -12.8      | %          |

 

Theincreases in selling prices for our products reflect strong markets due tosupply and demand factors. The decreases in the volumes of pulp and molassessold were due in part to lower product availability resulting from a 15.0%decrease in pulp produced and a 44.9 % decrease in molasses produced in thefirst six months of this fiscal year as compared to same time period lastfiscal year. Lower beginning inventory levels for both pulp and molasses this yearas compared to prior year also contributed to the reduction in the availabilityof these products for sale.

 

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Rentalrevenue on the ProGold operating lease was $12.0 million and $12.6 million forthe six months ended February 28, 2009 and February 29, 2008,respectively.

 

Costof sales for the six months ended February 28, 2009, exclusive of paymentsto members for sugarbeets, increased $53.0 million as compared to the sixmonths ended February 29, 2008. This increase was primarily related to the following:

 

·                  At the end of each reporting period, productinventories are recorded at their net realizable value.  The change in the net realizable value of theproduct inventories from the beginning of the reporting period is recorded onthe balance sheet as either an increase or decrease to inventories with acorresponding dollar for dollar adjustment to cost of sales on the statement ofoperations.  The increase in the netrealizable value of product inventories for the six months ended February 28,2009 was $149.6 million as compared to an increase of $196.7 million for theprevious year’s six month period ended February 29, 2008 resulting in a$47.1 million unfavorable change in the cost of sales between the two years asshown in the table below:

 

**Change in the Net Realizable Value of ProductInventories**

 
| ** **                                                   | ** ** | **For the Six Months Ended** | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(In Millions)**                                       | ** ** | **February 28  2009**                       | ** ** | **February 29  2008** | ** ** | **Change** | ** ** |
| Beginning  Product Inventories at Net Realizable Value       |       | $                                                | (150.6     | ) | $ | (156.4 | ) | $ | 5.8 | (1) |
| Ending Product  Inventories at Net Realizable Value          |       | 300.2                                            |       | 353.1 |   | (52.9 | )(2) |
| Increase in the  Net Realizable Value of Product Inventories |       | $                                                | 149.6      |   | $ | 196.7 |   | $ | (47.1 | ) |

 

----

(1) The change is primarily due to lowerquantities of products as of August 31, 2008 as compared to August 31,2007.

(2) The change isprimarily due to a 29.9 percent decrease in the hundredweight of sugarinventory as of February 28, 2009 as compared to February 29, 2008partially offset by a 15.9 percent increase in the per hundredweight netrealizable value of sugar inventory along with higher quantities and per tonnet realizable value of pulp inventory as of February 28, 2009 as comparedto February 29, 2008.

 

·                  Due to lower than anticipated sugarproduction and inventory levels during the first quarter of this year, theCompany’s sugar marketing agent, United Sugars Corporation, purchased and soldadditional sugar to meet our customers’ needs. As a result, the costs associated with purchased sugar increased $16.0million for the six months ended February 28, 2009, as compared to the sixmonths ended February 29, 2008.

·                  Factory operating costs increased $6.6million for the six months ended February 28, 2009, as compared to the sixmonths ended February 29, 2008, primarily due to higher costs associatedwith coke, limerock and chemicals.

·                  The cost recognized associated with thenon-member sugarbeets decreased $18.0 million for the six months ended February 28,2009, when compared to the six months ended February 29, 2008.  This decrease was primarily due to fewer tonsof sugarbeets harvested this year.

 

Selling,general and administrative expenses increased $4.3 million for the six monthsended February 28, 2009, as compared to the six months ended February 29,2008.  Selling expenses increased $5.4million primarily due to the increased freight and packaging costs for sugarpartially offset by lower freight costs for pulp and molasses resulting fromlower sales volumes.  General andadministrative expenses decreased $1.1 million due to general cost decreases.

 

Interestexpense decreased $2.6 million for the six months ended February 28, 2009,as compared to the six months ended February 29, 2008.  This was due to decreased short term and longterm average borrowing levels and lower short term and long term averageinterest rates.

 

TotalOther Income increased $3.9 million for the six months ended February 28,2009, as compared to the six months ended February 29, 2008.  This was due primarily to the receipt of $4.8million in November 2008 related to a legal settlement.

 

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Non-memberbusiness activities resulted in a gain of $ .8 million for the six months endedFebruary 28, 2009 as compared to a gain of $2.8 million for the six monthsended February 29, 2008.  Thedecrease was primarily related to the reduced earnings of Sidney Sugars andreduced income from the activities of ProGold.

** **

**Comparisonof the Three Months Ended February 28, 2009 and February 29, 2008**

** **

Revenuefor the three months ended February 28, 2009, was $273.6 million, anincrease of $20.8 million from the three months ended February 29,2008.  The table below reflects thepercentage changes in product revenues, prices and volumes for the three monthsended February 28, 2009, as compared to the three months ended February 29,2008.

 
| **Product** | ** ** | **Revenue** | ** ** | **Selling Price** | ** ** | **Volume** | ** ** |
|-------------|------------|-------------|------------|------------------------|------------|------------|------------|
| Sugar       |       | 3.7         | %          | 5.7                    | %          | -1.9       | %          |
| Pulp        |       | 36.3        | %          | 48.7                   | %          | -8.4       | %          |
| Molasses    |       | -66.1       | %          | 32.1                   | %          | -74.4      | %          |
| CSB         |       | 10.4        | %          | 18.5                   | %          | -6.8       | %          |
| Betaine     |       | 11.0        | %          | 31.4                   | %          | -15.5      | %          |

 

Theincreases in selling prices for our products reflect strong markets due tosupply and demand factors. The decreases in the volumes of pulp and molassessold were due in part to lower product availability resulting from a 6.4%decrease in pulp produced and a 76.9 % decrease in molasses produced in thethree months ended February 28, 2009 as compared to the three months endedFebruary 29, 2008. Lower production of both pulp and molasses in the firstquarter of 2009 as compared to the first quarter of 2008 also contributed tothe reduction in the availability of these products for sale in the secondquarter of 2009.

 

Rentalrevenue on the ProGold operating lease was $5.8 million in each of the threemonths ended February 28, 2009 and February 29, 2008.

 

Costof sales for the three months ended February 28, 2009, exclusive ofpayments to members for sugarbeets, increased $ .8 million as compared to thethree months ended February 29, 2008. This increase was primarily related to the following:

·                  At the end of each reporting period, productinventories are recorded at their net realizable value.  The change in the net realizable value of theproduct inventories from the beginning of the reporting period is recorded onthe balance sheet as either an increase or decrease to inventories with acorresponding dollar for dollar adjustment to cost of sales on the statement ofoperations.  The increase in the netrealizable value of product inventories for the three months ended February 28,2009 was $91.6 million as compared to an increase of $107.8 million for the previousyear’s three month period ended February 29, 2008 resulting in a $16.2million unfavorable change in the cost of sales between the two years as shownin the table below:

 

**Change in the Net Realizable Value of ProductInventories**

 
| ** **                                                   | ** ** | **For the Three Months Ended** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------------------|------------|
| **(In Millions)**                                       | ** ** | **February 28  2009**                         | ** ** | **February 29  2008** | ** ** | **Change** | ** ** |
| Beginning  Product Inventories at Net Realizable Value       |       | $                                                  | (208.6     | ) | $ | (245.3 | ) | $ | 36.7 | (1) |
| Ending Product  Inventories at Net Realizable Value          |       | 300.2                                              |       | 353.1 |   | (52.9 | )(2) |
| Increase in the  Net Realizable Value of Product Inventories |       | $                                                  | 91.6       |   | $ | 107.8 |   | $ | (16.2 | ) |

 

----

(1) The change isprimarily due to a 27.8 percent decrease in the hundredweight of sugarinventory as of November 30, 2008 as compared to November 30, 2007partially offset by an 11.5 percent increase in the per hundredweight netrealizable value of sugar inventory along with higher quantities and per tonnet realizable value of pulp inventory as of November 30, 2008 as comparedto November 30, 2007.

 

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(2) The change isprimarily due to a 29.9 percent decrease in the hundredweight of sugarinventory as of February 28, 2009 as compared to February 29, 2008partially offset by a 15.9 percent increase in the per hundredweight netrealizable value of sugar inventory along with higher quantities and per tonnet realizable value of pulp inventory as of February 28, 2009 as comparedto February 29, 2008.

 

·                  Factory operating costs increased $2.8million for the three months ended February 28, 2009, as compared to thethree months ended February 29, 2008, primarily due to higher costsassociated with coke and chemicals.

·                  The cost recognized associated with thenon-member sugarbeets decreased $17.7 million for the three months ended February 28,2009, when compared to the three months ended February 29, 2008.  This decrease was due to the completion ofthe processing campaign at the Sidney, Montana factory in the first quarter of2009 compared to last year’s processing campaign completion in the secondquarter.

 

Selling,general and administrative expenses decreased $1.1 million for the three monthsended February 28, 2009, as compared to the three months ended February 29,2008.  Selling expenses decreased $ .9million primarily due to the decreased freight and warehousing costs for sugarand lower freight costs for pulp and molasses resulting from lower salesvolumes.  General and administrative expensesdecreased $ .2 million due to general cost decreases.

 

Interestexpense decreased $2.4 million for the three months ended February 28,2009, as compared to the three months ended February 29, 2008.  This was due to decreased short term and longterm average borrowing levels and lower short term and long term averageinterest rates.

 

Non-memberbusiness activities resulted in a gain of $ .5 million for the three monthsended February 28, 2009 as compared to a gain of $1.1 million for thethree months ended February 29, 2008. The decrease was primarily related to the reduced earnings of SidneySugars.

** **

**Food,Conservation and Energy Act of 2008**

** **

TheFood, Conservation and Energy Act of 2008 (the Farm Bill) enacted in May, 2008,contains several provisions related to the domestic sugar industry, aimed atachieving balance and stability in the U.S. sugar market while minimizing thecost to the Federal government.  The FarmBill applies to the 2008 through 2012 crop years.  Generally, the Farm Bill:

 

·                  maintains a non-recourse loan program,

·                  sets a minimum overall allotment quantity forU.S. producers at no less than 85% of domestic consumption,

·                  maintains a system of marketing allocationsfor sugarbeet and sugar cane producers,

·                  restricts imports of foreign sugar and

·                  provides a new market balancing mechanism todivert any oversupply of sugar from sugar producers to ethanol producers.

 

Underthe Farm Bill, sugar processors can borrow funds on a non-recourse basis fromthe Commodity Credit Corporation (CCC), with repayment of such funds secured bysugar.  If the price of sugar drops belowthe forfeiture price, the processors can forfeit the sugar securing the loansto the CCC in lieu of repayment. Processors may also obtain CCC loans for “in-process” sugar or syrups at80 percent of the loan rate.

 

TheFarm Bill incorporates gradual loan rate increases for raw and refinedsugar.  For raw sugar, the loan rate willincrease three-quarters of a cent per pound, raw value, phased-in inquarter-cent increments over crop years 2009-2011.  Raw cane loan rates will remain at 18.00cents/lb in 2008 then rise gradually to 18.75 cents by 2011, and they willremain at 18.75 cents/lb for the 2012 crop year.  Refined beet sugar loan rates are set at22.90 cents/lb for the 2008 crop and thereafter are set at a rate equal to128.5 percent of the loan rate per pound for raw cane sugar for each of the2009 through 2012 crop years.

 

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TheUnited States Department of Agriculture (USDA) has historically maintained rawand refined sugar prices above the forfeiture price without cost to the U.S.Treasury by regulating the supply of sugar in the U.S. market throughmanagement of a tariff rate quota system. Currently, forty exporting countries retain guaranteed preferentialaccess to the U.S. market under World Trade Organization (WTO) and Free TradeAgreement (FTA) rules.  Mexico’s accesshas been unlimited since January 1, 2008. This Farm Bill sets a minimum overall allotment quantity for U.S.producers at no less than 85% of domestic consumption and provides a marketbalancing mechanism if there is an oversupply in the domestic sugar market.  If the Secretary of Agriculture determinesthere is an oversupply of sugar, the new market balancing mechanism requiresthe Secretary to divert the excess sugar from sugar producers to ethanolproducers while minimizing the cost to the U.S Treasury.  Although the market balancing mechanism willprovide sustainability to the sugar industry in the short term, there is noassurance that the sugar-to-ethanol program will be in place after the FarmBill expires.

 

Themarketing allotments and allocations set forth under the Farm Bill affect thesugar produced from the 2008 crop through the 2012 crop.  On an annual basis, the marketing allotmentsand the corresponding allocation to the Company will dictate the amount of sugarthe Company can sell into the domestic market. The Company’s marketing allocation for the 2008 crop is currently set atapproximately 35 million hundredweight. The Company’s allocation may reduce or increase the amount of sugar theCompany can market for a given year, thus affecting the number of acres ofsugarbeets required for processing to produce that amount of sugar.

** **

**NorthAmerican Free Trade Agreement**

 

TheNorth American Free Trade Agreement (NAFTA) governs sweetener trade between theUnited States and Mexico.  Under the NAFTA, tariffs on over-quota importsof sugar from and exports of sugar to Mexico expired on January 1,2008.  Imports of Mexican sugar could cause material harm to theUnited States sugar market.  The Company has no way to predict the extentto which Mexico will take advantage of its export opportunities**.**

** **

**Regionaland Bilateral Free Trade Agreements**

** **

Underthe current administration, the United States government may continue to pursueinternational trade agreements.  TheCompany monitors the U.S. government’s international trade policy because itmay lead to additional commitments to import sugar into the U.S. market.  Some of the countries who have eitherparticipated in trade agreements or are contemplated for new negotiations aremajor producers of sugar.  The primaryagreements affecting sugar that are completed or are being negotiated, to theCompany’s knowledge, include the Colombian Free Trade Agreement, Panama FreeTrade Agreement, the Trans-Pacific Free Trade Agreement, the Free Trade Area ofthe Americas, the Association of Southeast Asian Nations, South Africa,Thailand, and others.  The Companybelieves these agreements, if they reach fruition, could negatively impact theCompany’s profitability.  If increases inguaranteed access or reductions in sugar tariffs are included in theseagreements, excess sugar from these regions could enter the U.S. market and putpressure on domestic sugar prices.

 

ThePeru Free Trade Agreement has been ratified by the U.S. Congress and it becameeffective on February 1, 2009. Sugar trade with Peru is subject to a net surplus requirement.  Peru, typically a net importer, is unlikelyto meet that requirement most years. Negotiations have been completed on the U.S.-Colombian Free TradeAgreement and the U.S.-Panama Free Trade Agreement but they have not beenratified by the U.S. Congress.  TheCompany does not know when these trade agreements will be brought beforeCongress for a vote.

 

TheDoha Round negotiations of the WTO may be pursued by the U.S. Administrationand some of its international counterparts. It is unclear at this time whether negotiations will be completed.  If the negotiations are completed, theoutcome of any negotiated arrangement could have significant adverseconsequences for the Company.

 

TheU.S. sugar industry and the Company, as an influential member of such industry,recognize the potential negative impact that could result if these agreementsare entered into by the United States

 

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andare taking steps to attempt to positively influence the outcome.  The Company and the sugar industry intend tocontinue to focus significant attention on trade issues in the future.

 

Theimpact of the various trade agreements on the Company cannot be assessed atthis time due to the uncertainty concerning the terms of the agreements andwhether they will ultimately be implemented. It is possible, however, that the passage of various trade agreementscould have a material adverse effect on the Company through a reduction insugar selling prices, and a corresponding reduction in the beet payment to theshareholders.

** **

**Environmental**

** **

TheCompany is subject to extensive federal and state environmental laws andregulations with respect to water and air quality, solid waste disposal andodor and noise control.  The Companyconducts an ongoing compliance program designed to meet these environmentallaws and regulations.  The Companybelieves that it is in substantial compliance with applicable environmentallaws and regulations.  From time to time,however, the Company may be involved in investigations or determinationsregarding non-material matters that may arise.

 

TheCompany’s sugar manufacturing process is energy intensive and generates carbondioxide and other “Greenhouse Gases” (GHGs). Several bills have been introduced in the United States Senate and Houseof Representatives that would regulate GHGs and carbon dioxide emissions toreduce 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 regulationunder climate change policies in the relatively near future.  These policies, if adopted, will increase theCompany’s energy and other operating costs. Depending on how these policies address imports, the domestic market mayhave a competitive disadvantage with imported products.  These policies could have a significantnegative impact on the Company’s beet payment to shareholders if we are notable to pass the increased costs on to the Company’s customers****.****

 

OnNovember 25, 2008, the Company entered into a stipulation agreement withthe Minnesota Pollution Control Agency (MPCA) related to hydrogen sulfideemissions from its Crookston, East Grand Forks and Moorhead, Minnesotafactories.  As part of the stipulationagreement, the Company has agreed to make certain capital expenditures over thenext three years and implement specified changes in operating procedures tocontain hydrogen sulfide emissions at the Minnesota factories.  The required capital expenditures arecurrently estimated to be approximately $12 million.  The costs associated with operational changesare not currently known.

 

TheCompany works closely with all affected government agencies to resolveenvironmental issues that arise and believes they will be resolved without anyadverse effect on the Company.

 

TheCompany has identified capital expenditures for environmental related projectsover the next three years at the Company’s factory locations of approximately$26.0 million.

 

**Liquidityand Capital Resources**

 

Underthe Company’s Bylaws and Member Grower Contracts, payments for member-deliveredsugarbeets, the principal raw material used in producing the sugar andagri-products it sells, are subordinated to all member business expenses.  In addition, the beet payments made to membergrowers and non-member growers are paid in three payments over the course of ayear, and the member payments are made net of any anticipated unit retain forthe crop.  These procedures have theeffect of providing the Company with an additional source of short-termfinancing.  This financing arrangementmay result in an additional source of liquidity and reduced need for outsidefinancing in comparison to a similar business operated on a non-cooperativebasis.

 

Becausesugar is sold throughout the year (while sugarbeets are processed primarily inthe fall, winter and spring) and because substantial amounts of equipment arerequired for its operations, the Company has utilized substantial outsidefinancing on both a seasonal and long-term basis to fund its

 

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operations.  The majority of such financing has beenprovided by a consortium of lenders led by CoBank, ACB.

 

TheCompany has a seasonal line of credit through August 1, 2010, with aconsortium of lenders led by CoBank, ACB of $345.0 million, against whichthere was a $35.0 million outstanding balance as of February 28, 2009 anda line of credit with Wells Fargo Bank for $1 million, against which therewas no outstanding balance as of February 28, 2009.  The Company’s commercial paper programprovides short-term borrowings of up to $325 million of which approximately$58.3 million was outstanding as of February 28, 2009.  The Company had $2.2 million of short-termletters of credit outstanding as of February 28, 2009.  Any borrowings under the commercial paperprogram along with outstanding short-term letters of credit will act to reducethe available credit under the CoBank, ACB seasonal line of credit by acommensurate amount.  The unusedshort-term line of credit as of February 28, 2009, was $250.5million.  In addition, the Company hadoutstanding non-recourse loans with the CCC, as of February 28, 2009, ofapproximately $96.4 million, against which 4.2 million hundredweight of sugarwas pledged as collateral.

 

TheCompany also has long-term debt availability with CoBank, ACB of****$174.7 million, of which $36.3 million in loans and$70.2 million in long-term letters of credit were outstanding as of February 28,2009.  The unused long-term line ofcredit as of February 28, 2009, was $68.2 million.  In addition, the Company had long-term debtoutstanding, as of February 28, 2009, of $50 million from a privateplacement of Senior Notes that occurred in September of 1998; $2.9 millionfrom a private placement of Senior Notes that occurred in January of 2003;and $70.4 million from seven separate issuances of Pollution Control andIndustrial Development Revenue Bonds.

 

TheCompany had outstanding purchase commitments totaling $7.0 million as of February 28,2009, for equipment and construction contracts related to various capital andmaintenance projects.

 

Theliquidity changes that have occurred in the Company’s financial statements fromAugust 31, 2008, to February 28, 2009, were primarily due to normalbusiness seasonality.  The first sixmonths of the Company’s fiscal year includes: the completion of the sugarbeetharvest; the startup of the processing campaign; the final payments to growersfor sugarbeets delivered from the previous year’s crop; and the initialpayments to growers for sugarbeets delivered from the current year’s crop.

 

Thenet cash used by operations was $110.1 million for the six months ended February 28,2009, as compared to $162.4 million for the six months ended February 29,2008.  This decrease in the use of cashof $52.3 million was primarily the result of the following:

 

·                  Changes in the Amount Due Growers of $35.0million were due to a higher final total grower payment last year and a higherestimated per ton member grower payment this year as compared to last year atthis time. These were partially offset by a reduction in the current year’stotal estimated grower payment due to a reduction in tons harvested.

·                  Changes in Advances to Related Parties of$9.7 million were due primarily to the timing of the cash requirements of ourmarketing agents.

·                  Changes in Accounts Payable of $8.4 millionand changes in Other Liabilities of $10.2 million were due to a higherbeginning of the year balance last year resulting from an early campaignstart-up in August.

·                  Changes in Inventories of $3.7 million wereprimarily due to a smaller increase in finished products of $24.9 millionpartially offset by an increased value of unprocessed sugarbeets of $20.1million along with an increase of $1.1 million of supplies and parts inventory.

·                  The above changes were partially offset bythe change in Accounts Receivable of $6.6 million due to increased collectionslast year on a larger beginning of the year receivable balance resulting fromincreased sales and the change in Accrued Continuing Costs of $5.6 millionresulting from the difference in the timing of revenues and expenses betweenthe two years.

 

Thenet cash used in investing activities was $14.1 million for the six monthsended February 28, 2009, as compared to $18.3 million for the six monthsended February 29, 2008.  Thedecrease of 4.2 million was due to decreased purchases of property andequipment of $6.4 million partially offset by a change in other assets of $2.2million.

 

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Thenet cash provided by financing activities was $124.3 million for the six monthsended February 28, 2009, as compared to $184.4 million for the six monthsended February 29, 2008.  Thisdecrease of $60.1 million was primarily due to decreased proceeds fromshort-term debt of $41.0 million, increased payments on long term debt of $23.9million, distributions to Minority Interest of $5.9 million and increasedpayments of unit retains of $4.5 million partially offset by increased proceedsfrom long-term debt of $15.2 million.

 

TheCompany anticipates that the funds necessary for working capital requirementsand future capital expenditures will be derived from operations and unitretains along with short-term and long-term borrowings.

 

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

** **

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

 

TheCompany does not believe that there is any material market risk exposure withrespect to interest rates, exchange rates, commodity prices, equity prices andother market changes that would require disclosure under this item.

** **

**Item 4.   Controls and Procedures**

** **

TheCompany’s chief executive officer and chief financial officer have reviewed andevaluated the effectiveness of the Company’s disclosure controls and procedures(as defined in Rules 240.13a-15(e) and 15d-15(e) promulgatedunder the Securities Exchange Act of 1934) as of February 28, 2009.  Based on that review and evaluation, whichincluded inquiries made to certain other employees of the Company, the chiefexecutive officer and chief financial officer have concluded that the Company’scurrent disclosure controls and procedures, as designed and implemented, areeffective in ensuring that information relating to the Company required to bedisclosed in the reports the Company files or submits under the SecuritiesExchange Act of 1934 is recorded, processed, summarized and reported within thetime periods specified in the Securities and Exchange Commission’s rules andforms, including ensuring that such information is accumulated and communicatedto the Company’s management, including the chief executive officer and thechief financial officer, as appropriate to allow timely decisions regardingrequired disclosure.  There were nochanges in the Company’s internal controls over financial reporting thatoccurred during the Company’s most recent fiscal quarter that may havematerially affected, or are reasonably likely to materially affect, the Company’sinternal control over financial reporting.

## ** **

## **PART II.OTHER INFORMATION**

 

#### **Item1.  Legal Proceedings**

 

Fromtime to time and in the ordinary course of its business, the Company is namedas a defendant in legal proceedings related to various issues, including worker’scompensation claims, tort claims and contractual disputes.  The Company is currently involved in certainlegal proceedings, which have arisen in the ordinary course of the Company’sbusiness.  The Company is also aware ofcertain other potential claims, which could result in the commencement of legalproceedings.  The Company carriesinsurance, which provides protection against certain types of claims.  With respect to current litigation and potentialclaims of which the Company is aware, the Company’s management believes that (i) theCompany has insurance protection to cover all or a portion of any judgmentswhich may be rendered against the Company with respect to certain claims oractions and (ii) any judgments which may be entered against the Companyand which may exceed such insurance coverage or which may arise in

 

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actionsinvolving potential liabilities not covered by insurance policies are notlikely to have a material adverse effect upon the Company, or its assets oroperations.

** **

OnFebruary 11, 2009, the Ninth Circuit Court of Appeals (the Court) issuedits decision in the case of *Amalgamated Sugar Co, LLCv. Thomas Vilsack; Department of Agriculture*, a case that involvedAmalgamated Sugar’s challenge of a decision by the United States Department ofAgriculture (USDA) to transfer certain sugar marketing allocations to theCompany.  The Court reversed the lowercourt’s decision which confirmed the USDA’s transfer of the marketingallocations, and remanded the case back to the lower court for furtheraction.  The Company has appealed theCourt’s decision to protect the Company’s interests in the marketingallocations.  If the Court’s decision isimplemented as it currently stands, the Company would experience a netreduction of marketing allocations of approximately 1 million CWT.  The Company does not believe that any futureloss of these marketing allocations will have a material impact on the Company’splanted acres going forward, assuming average crop yield, crop quality andcontinued domestic consumption trends.

** **

**Item1A.  Risk Factors.**

** **

Fora detailed discussion of certain risk factors that could affect the Company’soperations, financial condition or results for future periods, see Item 1A,Risk factors, in the Company’s 2008 Annual Report on Form 10-K.

 

**Federal, state and localenvironmental laws and regulations may impact our operations.**

### ** **

### **We are subject to extensive federaland state environmental laws and regulations with respect to water and airquality and solid waste disposal.  Weconduct on-going programs designed to meet these environmental laws andregulations.  Changes in environmentallaws or regulations or complying with existing environmental laws andregulations or enforcement action brought under such environmental laws andregulations might increase the cost of operating our facilities or result insignificant capital investment.  Any suchchanges or compliance costs could have adverse financial consequences to ourprofitability.**

 

Oursugar manufacturing process is energy intensive and generates carbon dioxideand other “Greenhouse Gases” (GHGs). Several bills have been introduced in the United States Senate and Houseof Representatives that would regulate GHGs and carbon dioxide emissions toreduce the impact of global climate change. We believe it is likely that industries generating GHGs, including us,will be subject to either federal or state regulation under climate changepolicies in the relatively near future. These policies, if adopted, will increase our energy and other operatingcosts.  Depending on how these policiesaddress imports, the domestic market may have a competitive disadvantage withimported products.  These policies couldhave a significant negative impact on our beet payment to shareholders if weare not able to pass the increased costs on to our customers****.****

** **

**Item2.  Unregistered Sales of EquitySecurities and Use of Proceeds.**

 

None

** **

**Item3.  Defaults Upon Senior Securities**

** **

None

### ** **

**Item 4.  Submission of Matters toa Vote of Security Holders**

 

None.

 

**Item5.  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         | Form of Member  Control Agreement between Registrant and ProGold Limited Liability Company                                | Incorporated by  reference to Exhibit 10(v) from the Company’s Registration  Statement on Form S-1 (File No. 33-83868), declared effective  November 23, 1994.  |
|         |                                                                                                                           |                                                                                                                                                                                          |
| 10.3         | 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                                             |
|         |                                                                                                                           |                                                                                                                                                                                          |
| 10.4         | 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                                             |
|         |                                                                                                                           |                                                                                                                                                                                          |
| 10.5         | 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                                             |
|         |                                                                                                                           |                                                                                                                                                                                          |
| ++10.6       | 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                                             |
|         |                                                                                                                           |                                                                                                                                                                                          |
| 10.7         | Uniform Member  Marketing Agreement between the Registrant and Midwest Agri-Commodities  Company dated September 1, 2001. | Incorporated by  reference to Exhibit 10.28 from the Company’s Form 10-Q for the  quarter ended November 30, 2001                                                         |

 

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| 10.8    | 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             |
|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------|
|    |                                                                                                                                                |                                                                                                                                              |
| ++10.9  | 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 |
|    |                                                                                                                                                |                                                                                                                                              |
| 10.10   | Term and Seasonal Loan  Agreements between the Registrant and CoBank, ACB dated July 31, 2006                                                  | Incorporated by  reference to Exhibit 10.24 from the Company’s Annual Report on  Form 10-K for the year ended August 31, 2006 |
|    |                                                                                                                                                |                                                                                                                                              |
| 10.11   | Second Amendment to Amended and Restated Loan Agreement between the  Registrant and CoBank, ACB dated November 3, 2006.                        | Incorporated by  reference to Exhibit 10.25 from the Company’s Form 10-Q for the  quarter ended November 30, 2006.            |
|    |                                                                                                                                                |                                                                                                                                              |
| ++10.12 | 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.            |
|    |                                                                                                                                                |                                                                                                                                              |
| 10.13   | Third Amendment to Amended and Restated Loan Agreement between the  Registrant and CoBank, ACB dated April 2, 2007.                            | Incorporated by  reference to Exhibit 10.22 from the Company’s Form 10-Q for the  quarter ended May 31, 2007                  |
|    |                                                                                                                                                |                                                                                                                                              |
| 10.14   | Fourth Amendment to Amended and Restated Loan Agreement between the  Registrant and CoBank, ACB dated July 25, 2007.                           | Incorporated by  reference to Exhibit 10.23 from the Company’s Annual Report on  Form 10-K for the year ended August 31, 2007 |
|    |                                                                                                                                                |                                                                                                                                              |
| 10.15   | 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 |
|    |                                                                                                                                                |                                                                                                                                              |
| 10.16   | Commitment and Acceptance Agreement between the  Registrant and CoBank, ACB dated November 6, 2007                                             | Incorporated by reference to Exhibit 10.24 from  the Company’s Form 10-Q for the quarter ended November 30, 2007              |
|    |                                                                                                                                                |                                                                                                                                              |
| 10.17   | 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 |
|    |                                                                                                                                                |                                                                                                                                              |
| 10.18   | Fifth Amendment to Amended  and Restated Loan Agreement between the Registrant and CoBank, ACB dated  July 23, 2008.                           | Incorporated by reference to Exhibit 10.23 from  the Company’s Annual Report on Form 10-K for the year ended  August 31, 2008 |
|    |                                                                                                                                                |                                                                                                                                              |
| 10.19   | 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              |
|    |                                                                                                                                                |                                                                                                                                              |
| ++10.20 | 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              |
|    |                                                                                                                                                |                                                                                                                                              |
| ++10.21 | 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             |

 

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| ++10.22 | First Amendment to 2005  Long-Term Incentive Plan, dated December 20, 2006.   | Filed herewith electronically

                                                                                                             |
|---------|------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------|
|    |                                                                               |                                                                                                                                             |
| ++10.23 | Second Amendment to  2005 Long-Term Incentive Plan, dated November 5, 2007.   | Filed herewith electronically

                                                                                                             |
|    |                                                                               |                                                                                                                                             |
| ++10.24 | Third Amendment to 2005  Long-Term Incentive Plan, dated December 11, 2008.   | Filed herewith electronically

                                                                                                             |
|    |                                                                               |                                                                                                                                             |
| 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, 2008 |
|    |                                                                               |                                                                                                                                             |
| 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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+              Confidentialtreatment under Rule 24b-2 of the Securities and Exchange Act of 1934, asamended, has been granted with respect to designated portions of this document.

 

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

 

SIGNATURES

** **

**Pursuantto the requirement of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.**

** **

** **
| ** ** | ** **              | **AMERICAN CRYSTAL SUGAR COMPANY** |
|------------|-------------------------|------------------------------------|
| ** ** | ** **              | ** **                         | **(Registrant)** |
| ** ** | ** **              | ** **                         |
| ** ** | ** **              | ** **                         |
| **Date:**  | **April 14, 2009** | ** **                         | **/s/ Teresa Warne** |
| ** ** | ** **              | **Teresa Warne**                   |
| ** ** | ** **              | **Corporate Controller,**          |
| ** ** | ** **              | **Chief Accounting Officer**       |
| ** ** | ** **              | **Duly  Authorized Officer**       |
|            |                         |                                    |  |  |

 

24

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