Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

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

** **

# **Forthe quarterly period ended February 28, 2010**

# ** **

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

## ** **

**AMERICAN CRYSTAL 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

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). YES o  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 mark whether the registrant is ashell company (as defined in rule 12b-2 of the Act).  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 8,  2010** |
| **$10 Par Value**               | ** ** | **2,778**               |

 

 

 

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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 FINANCIAL CONDITION AND RESULTS OF OPERATIONS** | **13**       |
| **ITEM 3.**      | **QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**                                 | **21**       |
| **ITEM 4T.**     | **CONTROLS AND  PROCEDURES**                                                                    | **21**       |
|             |                                                                                            |         |
| **PART II** | **OTHER INFORMATION**                                                                           |         |
|             |                                                                                            |         |
| **ITEM 1.**      | **LEGAL PROCEEDINGS**                                                                           | **22**       |
| **ITEM 1A.**     | **RISK FACTORS**                                                                                | **22**       |
| **ITEM 2.**      | **UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**                                | **22**       |
| **ITEM 3.**      | **DEFAULTS  UPON SENIOR SECURITIES**                                                            | **22**       |
| **ITEM 4.**      | **SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS**                                        | **23**       |
| **ITEM 5.**      | **OTHER INFORMATION**                                                                           | **23**       |
| **ITEM  6.**     | **EXHIBITS**                                                                                    | **24**       |
|             |                                                                                            |         |
| **SIGNATURES**   |                                                                                            | **26**       |

 

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**American Crystal Sugar Company**

**ConsolidatedBalance Sheets**

**(Unaudited)**

**(In Thousands)**

** **

**Assets**

 
| ** **                                     | ** ** | **February 28** | ** ** | **August 31** | ** ** |
|------------------------------------------------|------------|----------------------|------------|--------------------|------------|
| ** **                                     | ** ** | **2010**             | ** ** | **2009**           | ** ** | **2009*** | ** ** |
| **Current Assets:**                            |       |                 |       |               |       |   |   |
| Cash and Cash Equivalents                      |       | $                    | 321        |               | $          | 129 |   | $ | 127 |   |
| Receivables:                                   |       |                 |       |               |       |   |   |
| Trade                                          |       | 68,243               |       | 51,523             |       | 61,665 |   |
| Members                                        |       | 28                   |       | 20                 |       | 4,480 |   |
| Other                                          |       | 1,455                |       | 5,707              |       | 2,565 |   |
| Advances to Related Parties                    |       | 3,276                |       | 10,483             |       | 22,744 |   |
| Inventories                                    |       | 493,777              |       | 492,539            |       | 181,311 |   |
| Prepaid Expenses                               |       | 1,849                |       | 1,534              |       | 864 |   |
|                                           |       |                 |       |               |       |   |   |
| **Total Current Assets**                       |       | 568,949              |       | 561,935            |       | 273,756 |   |
| ** **                                     |       |                 |       |               |       |   |   |
| **Property and Equipment:**                    |       |                 |       |               |       |   |   |
| Land and Land Improvements                     |       | 68,822               |       | 63,373             |       | 67,011 |   |
| Buildings                                      |       | 120,229              |       | 114,899            |       | 116,907 |   |
| Equipment                                      |       | 903,750              |       | 877,658            |       | 892,678 |   |
| Construction in Progress                       |       | 16,487               |       | 6,655              |       | 14,522 |   |
| Less Accumulated Depreciation                  |       | (764,900             | )          | (727,404           | )          | (737,182 | ) |
|                                           |       |                 |       |               |       |   |   |
| **Net Property and Equipment**                 |       | 344,388              |       | 335,181            |       | 353,936 |   |
| ** **                                     |       |                 |       |               |       |   |   |
| **Net Property and Equipment Held  for Lease** |       | 106,639              |       | 115,333            |       | 111,015 |   |
| ** **                                     |       |                 |       |               |       |   |   |
| **Other Assets:**                              |       |                 |       |               |       |   |   |
| Investments in CoBank, ACB                     |       | 10,258               |       | 9,946              |       | 10,111 |   |
| Investments in Marketing Cooperatives          |       | 368                  |       | 4,247              |       | 135 |   |
| Pension Asset                                  |       | —               |       | 35,456             |       | — |   |
| Other Assets                                   |       | 12,056               |       | 10,491             |       | 12,305 |   |
|                                           |       |                 |       |               |       |   |   |
| **Total Other Assets**                         |       | 22,682               |       | 60,140             |       | 22,551 |   |
| ** **                                     |       |                 |       |               |       |   |   |
| **Total Assets**                               |       | $                    | 1,042,658  |               | $          | 1,072,589 |   | $ | 761,258 |   |

 

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** | ** ** | **August 31** | ** ** |
|-----------------------------------------------------------------|------------|----------------------|------------|--------------------|------------|
| ** **                                                      | ** ** | **2010**             | ** ** | **2009**           | ** ** | **2009*** | ** ** |
| **Current Liabilities:**                                        |       |                 |       |               |       |   |   |
| Short-Term Debt                                                 |       | $                    | 150,026    |               | $          | 189,721 |   | $ | 45,989 |   |
| Current Maturities of Long-Term Debt                            |       | 11,507               |       | 20,192             |       | 18,789 |   |
| Accounts Payable                                                |       | 24,784               |       | 23,534             |       | 35,381 |   |
| Advances Due to Related Parties                                 |       | 1,397                |       | 1,180              |       | 1,863 |   |
| Accrued Continuing Costs                                        |       | 81,655               |       | 57,659             |       | — |   |
| Other Current Liabilities                                       |       | 35,648               |       | 26,628             |       | 34,034 |   |
| Amounts Due Growers                                             |       | 222,493              |       | 206,823            |       | 87,218 |   |
|                                                            |       |                 |       |               |       |   |   |
| **Total Current Liabilities**                                   |       | 527,510              |       | 525,737            |       | 223,274 |   |
|                                                            |       |                 |       |               |       |   |   |
| **Long-Term Debt, Net of Current  Maturities**                  |       | 130,927              |       | 139,372            |       | 143,073 |   |
|                                                            |       |                 |       |               |       |   |   |
| **Accrued Employee Benefits**                                   |       | 46,768               |       | 34,934             |       | 46,458 |   |
|                                                            |       |                 |       |               |       |   |   |
| **Other Liabilities**                                           |       | 10,859               |       | 8,345              |       | 8,925 |   |
|                                                            |       |                 |       |               |       |   |   |
| **Total Liabilities**                                           |       | 716,064              |       | 708,388            |       | 421,730 |   |
|                                                            |       |                 |       |               |       |   |   |
| **Commitments and Contingencies**                               |       |                 |       |               |       |   |   |
|                                                            |       |                 |       |               |       |   |   |
| **Members’ Investments:**                                  |       |                 |       |               |       |   |   |
| Preferred Stock                                                 |       | 38,275               |       | 38,275             |       | 38,275 |   |
| Common Stock                                                    |       | 28                   |       | 28                 |       | 28 |   |
| Additional Paid-In Capital                                      |       | 152,261              |       | 152,261            |       | 152,261 |   |
| Unit Retains                                                    |       | 164,384              |       | 149,502            |       | 181,601 |   |
| Equity Retention                                                |       | —               |       | 1,153              |       | — |   |
| Accumulated Other Comprehensive Income (Loss)                   |       | (60,110              | )          | (8,603             | )          | (63,705 | ) |
| Retained Earnings (Accumulated Deficit)                         |       | (21,138              | )          | (25,378            | )          | (23,882 | ) |
|                                                            |       |                 |       |               |       |   |   |
| Total American Crystal Sugar Company Members’  Investments |       | 273,700              |       | 307,238            |       | 284,578 |   |
|                                                            |       |                 |       |               |       |   |   |
| Noncontrolling Interests                                        |       | 52,894               |       | 56,963             |       | 54,950 |   |
|                                                            |       |                 |       |               |       |   |   |
| **Total Members’ Investments**                             |       | 326,594              |       | 364,201            |       | 339,528 |   |
|                                                            |       |                 |       |               |       |   |   |
| **Total Liabilities and Members’  Investments**            |       | $                    | 1,042,658  |               | $          | 1,072,589 |   | $ | 761,258 |   |

 

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  February 28** | ** ** | **For the Three Months Ended  February 28** | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                              | ** ** | **2010**                                       | ** ** | **2009**                                         | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Net Revenue**                                                                         |       | $                                              | 587,770    |                                             | $          | 596,587 |   | $ | 268,362 |   | $ | 273,532 |   |
|                                                                                    |       |                                           |       |                                             |       |   |   |   |   |
| **Cost of Sales**                                                                       |       | 45,463                                         |       | 75,515                                           |       | (3,146 | ) | 14,734 |   |
|                                                                                    |       |                                           |       |                                             |       |   |   |   |   |
| **Gross Proceeds**                                                                      |       | 542,307                                        |       | 521,072                                          |       | 271,508 |   | 258,798 |   |
|                                                                                    |       |                                           |       |                                             |       |   |   |   |   |
| **Selling, General and  Administrative Expenses**                                       |       | 117,850                                        |       | 124,026                                          |       | 56,131 |   | 55,620 |   |
| **Accrued Continuing Costs**                                                            |       | 81,655                                         |       | 57,659                                           |       | 25,493 |   | 15,293 |   |
|                                                                                    |       |                                           |       |                                             |       |   |   |   |   |
| **Operating Proceeds**                                                                  |       | 342,802                                        |       | 339,387                                          |       | 189,884 |   | 187,885 |   |
|                                                                                    |       |                                           |       |                                             |       |   |   |   |   |
| **Other Income (Expense):**                                                             |       |                                           |       |                                             |       |   |   |   |   |
| Interest Income                                                                         |       | 33                                             |       | 118                                              |       | 24 |   | 9 |   |
| Interest Expense, Net                                                                   |       | (4,478                                         | )          | (5,345                                           | )          | (2,456 | ) | (2,918 | ) |
| Other, Net                                                                              |       | (80                                            | )          | 4,428                                            |       | 27 |   | (181 | ) |
|                                                                                    |       |                                           |       |                                             |       |   |   |   |   |
| **Total Other Income (Expense)**                                                        |       | (4,525                                         | )          | (799                                             | )          | (2,405 | ) | (3,090 | ) |
|                                                                                    |       |                                           |       |                                             |       |   |   |   |   |
| **Proceeds Before Income Tax  Expense**                                                 |       | 338,277                                        |       | 338,588                                          |       | 187,479 |   | 184,795 |   |
|                                                                                    |       |                                           |       |                                             |       |   |   |   |   |
| **Income Tax Expense**                                                                  |       | (1,902                                         | )          | (568                                             | )          | (516 | ) | (374 | ) |
|                                                                                    |       |                                           |       |                                             |       |   |   |   |   |
| **Consolidated Net Proceeds**                                                           |       | 336,375                                        |       | 338,020                                          |       | 186,963 |   | 184,421 |   |
|                                                                                    |       |                                           |       |                                             |       |   |   |   |   |
| **Less: Net Proceeds Attributable  to****Noncontrolling Interests**                     |       | (3,201                                         | )          | (3,059                                           | )          | (1,466 | ) | (1,388 | ) |
|                                                                                    |       |                                           |       |                                             |       |   |   |   |   |
| **Net Proceeds Attributable to****American Crystal Sugar Company**                      |       | $                                              | 333,174    |                                             | $          | 334,961 |   | $ | 185,497 |   | $ | 183,033 |   |
|                                                                                    |       |                                           |       |                                             |       |   |   |   |   |
| **Distributions of Net Proceeds  Attributable to****American  Crystal Sugar Company:**  |       |                                           |       |                                             |       |   |   |   |   |
| Credited (Charged) to American Crystal Sugar Company’s  Members’ Investments: |       |                                           |       |                                             |       |   |   |   |   |
| Non-Member Business Income                                                              |       | $                                              | 2,744      |                                             | $          | 814 |   | $ | 749 |   | $ | 535 |   |
| Unit Retains Declared to Members                                                        |       | —                                         |       | —                                           |       | — |   | — |   |
| Net Credit to American Crystal Sugar Company’s  Members’ Investments          |       | 2,744                                          |       | 814                                              |       | 749 |   | 535 |   |
| Payments To/Due Members for Sugarbeets, Net of  Unit Retains Declared                   |       | 330,430                                        |       | 334,147                                          |       | 184,748 |   | 182,498 |   |
| **Total**                                                                               |       | $                                              | 333,174    |                                             | $          | 334,961 |   | $ | 185,497 |   | $ | 183,033 |   |

 

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** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                            | ** ** | **2010**                                       | ** ** | **2009** | ** ** |
| **Cash Provided By (Used In)  Operating Activities:**                 | ** ** | ** **                                     | ** ** | ** ** | ** ** |
| Net Proceeds Attributable to American Crystal  Sugar Company          |       | $                                              | 333,174    |   | $ | 334,961 |   |
| Payments To/Due Members for Sugarbeets, Net of  Unit Retains Declared |       | (330,430                                       | )          | (334,147 | ) |
| Add (Deduct) Non-Cash Items:                                          |       |                                           |       |   |   |
| Depreciation and Amortization                                         |       | 35,175                                         |       | 35,274 |   |
| (Income)/Loss from Equity Method Investees                            |       | 1                                              |       | (10 | ) |
| Loss on the Disposition of Property and Equipment                     |       | 131                                            |       | 494 |   |
| Non-Cash Portion of Patronage Dividend from  CoBank, ACB              |       | (147                                           | )          | — |   |
| Deferred Gain Recognition                                             |       | (32                                            | )          | (54 | ) |
| Noncontrolling Interests                                              |       | 3,201                                          |       | 3,059 |   |
| Changes in Assets and Liabilities:                                    |       |                                           |       |   |   |
| Receivables                                                           |       | (1,016                                         | )          | 14,201 |   |
| Inventories                                                           |       | (312,466                                       | )          | (304,211 | ) |
| Prepaid Expenses                                                      |       | (1,004                                         | )          | (372 | ) |
| Non Current Pension Asset/Liability                                   |       | 2,560                                          |       | 315 |   |
| Advances To/Due to Related Parties                                    |       | 19,002                                         |       | 7,745 |   |
| Accounts Payable                                                      |       | (5,401                                         | )          | (7,754 | ) |
| Accrued Continuing Costs                                              |       | 81,655                                         |       | 57,659 |   |
| Other Liabilities                                                     |       | 4,711                                          |       | 1,377 |   |
| Amounts Due Growers                                                   |       | 135,275                                        |       | 85,891 |   |
| **Net Cash Used In Operating  Activities**                            |       | (35,611                                        | )          | (105,572 | ) |
|                                                                  |       |                                           |       |   |   |
| **Cash Provided By (Used In)  Investing Activities:**                 |       |                                           |       |   |   |
| Purchases of Property and Equipment                                   |       | (24,808                                        | )          | (17,709 | ) |
| Purchases of Property and Equipment Held for Lease                    |       | (1,287                                         | )          | (1,057 | ) |
| Proceeds from the Sale of Property and Equipment                      |       | 3                                              |       | 6 |   |
| Changes in Other Assets                                               |       | (238                                           | )          | 78 |   |
| **Net Cash Used In Investing  Activities**                            |       | (26,330                                        | )          | (18,682 | ) |
|                                                                  |       |                                           |       |   |   |
| **Cash Provided By (Used In)  Financing Activities:**                 |       |                                           |       |   |   |
| Net Proceeds from Short-Term Debt                                     |       | 104,037                                        |       | 174,424 |   |
| Proceeds from Issuance of Long-Term Debt                              |       | —                                         |       | 34,350 |   |
| Long-Term Debt Repayment                                              |       | (19,428                                        | )          | (53,578 | ) |
| Distributions to Noncontrolling Interests                             |       | (5,257                                         | )          | (5,935 | ) |
| Payment of Unit Retains and Equity Retention                          |       | (17,217                                        | )          | (25,006 | ) |
| **Net Cash Provided By Financing  Activities**                        |       | 62,135                                         |       | 124,255 |   |
| **Increase In Cash and Cash  Equivalents**                            |       | 194                                            |       | 1 |   |
| **Cash and Cash Equivalents,  Beginning of Year**                     |       | 127                                            |       | 128 |   |
|                                                                  |       |                                           |       |   |   |
| **Cash and Cash Equivalents, End of  Period**                         |       | $                                              | 321        |   | $ | 129 |   |

 

**Non-Cash Investing Activities:**Purchases ofProperty and Equipment include the changes in accounts payable related to thesepurchases of ($5,196,000) and ($4,548,000) for the six months ended February 28,2010 and 2009, respectively.

 

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

 

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# **AMERICANCRYSTAL SUGAR COMPANY**

**NOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTS**

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

**February 28, 2010 and 2009**

**(Unaudited)**

 

**Note1:  Basis of Presentation**

 

Theunaudited consolidated financial statements of American Crystal Sugar Company(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, 2009.

 

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.

 

Inaccordance with authoritative guidance issued by the Financial AccountingStandards Board (FASB)*,*the Companyhas, on a retrospective basis for all periods presented in this report,included the net proceeds attributable to noncontrolling interests, previouslyreferred to as minority interest, as a component of consolidated net proceedsreflected on the Consolidated Statements of Operations. In addition,noncontrolling interests on the Consolidated Balance Sheets are now reflectedas a component of Total Members’ Investments.

 

Certainother reclassifications have been made to the February 28, 2009consolidated financial statements to conform with the February 28, 2010presentation.  These reclassificationshad no effect on previously reported results of operations or Members’Investments.

 

Theoperating results for the six months ended February 28, 2010, are notnecessarily indicative of the results that may be expected for the year ended August 31,2010.  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 2009 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 2009 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**

 

InDecember 2008, the FASB issued authoritative guidance regarding anemployer’s disclosure about plan assets of a defined benefit pension plan orother postretirement plan.  This guidancebecomes effective for the Company in the fourth quarter of fiscal 2010.  The Company does not expect that the adoptionof this guidance will have a material effect on the Company’s financialstatements.

 

In June and December 2009,the FASB issued authoritative guidance to improve the relevance,representational faithfulness, and comparability of the information that areporting entity provides in its financial reports about a transfer offinancial assets; the effects of a transfer on its financial position,financial performance, and cash flows; and a transferor’s continuinginvolvement in transferred financial 

 

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assets.  This guidance becomes effective for theCompany in fiscal 2011.  The Company doesnot expect that the adoption of this guidance will have a material effect onthe Company’s financial statements.

 

In June and December 2009,the FASB issued authoritative guidance to improve financial reporting byenterprises involved with variable interest entities and to provide morerelevant and reliable information to users of financial statements. Thisguidance becomes effective for the Company in fiscal 2011.  The Company does not expect that the adoptionof this guidance will have a material effect on the Company’s financialstatements.

 

In October 2009, theFASB issued an update to the authoritative guidance which contains amendmentsto the criteria for separating consideration in multiple-deliverablearrangements and expands disclosures related to such arrangements.  The guidance provided by this update becomeseffective for the Company in fiscal 2011. The Company does not expect that theadoption of this guidance will have a material effect on the Company’sfinancial statements.

 

In January 2010, theFASB issued an update to the authoritative guidance which contains amendmentsto the guidance related to accounting for decreases in the ownership of asubsidiary and expands the disclosures related to such events. The guidanceprovided by this update became effective and was adopted by the Company in thesecond quarter of fiscal 2010.

 

In January 2010, theFASB issued an update to the authoritative guidance which contains amendmentsand clarification to the guidance related to the disclosures involvingrecurring or nonrecurring fair value measurements. The new disclosures andclarifications become effective for the Company in the third quarter of fiscal2010 except for the disclosures about purchases, sales, issuances andsettlements in the roll forward activity in Level 3 fair value measurementswhich becomes effective for the Company in the first quarter of fiscal 2012.The Company does not expect that the adoption of this guidance will have amaterial effect on the Company’s financial statements.

 

**Note3:  Inventories**

 

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

 
| ** **                                                     | ** ** | **February 28  2010** | ** ** | **February 28  2009** | ** ** | **August 31  2009** | ** ** |
|----------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|--------------------------|------------|
| Sugar,  Pulp, Molasses, Other Agri-Products and Sugarbeet Seed |       | $                          | 334,665    |                       | $          | 304,794                  |       | $ | 138,039 |   |
| Unprocessed  Sugarbeets                                        |       | 122,755                    |       | 152,255                    |       | —                   |       |
| Maintenance  Parts and Supplies                                |       | 36,357                     |       | 35,490                     |       | 43,272                   |       |
|                                                           |       |                       |       |                       |       |                     |       |
| Total  Inventories                                             |       | $                          | 493,777    |                       | $          | 492,539                  |       | $ | 181,311 |   |

 

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 through July 30, 2012,with a consortium of lenders led by CoBank, ACB of $320.0 million and aline of credit with Wells Fargo Bank for $1.0 million.  The Company’s commercial paper programprovides short-term borrowings of up to $320 million.  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 Company alsoutilizes the Commodity Credit Corporation (CCC) to meet its short-termborrowing needs.

 

As of February 28,2010, the Company had outstanding commercial paper of $150.0****million at average interest rates of .35% to .53% andmaturity dates between March 1, 2010 and March 31, 2010.  The Company had no outstanding short-termdebt with CoBank, ACB or the CCC as of February 28, 

 

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2010.  The Company had $2.9 million of short-termletters of credit outstanding as of February 28, 2010.  The unused seasonal line of credit as of February 28,2010 was $168.1 million.

 

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.  In addition,the Company had outstanding non-recourse loans with the CCC of $96.4 million,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.

 

**Note5:  Long-Term Debt**

 

The Company has long-term debt availability through December 31,2011, with CoBank, ACB of****$156.6 million,of which $22.3 million in loans and $70.8 million in long-term letters ofcredit were outstanding as of February 28, 2010.  The unused long-term line of credit as of February 28,2010, was $63.5 million.  In addition,the Company had long-term debt outstanding, as of February 28, 2010, of$50 million from a private placement of Senior Notes that occurred in September of1998 and $70.1 million from five separate issuances of Pollution Controland Industrial Development Revenue Bonds.

 

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.

 

**Note6:  Interest Paid and InterestCapitalized**

 

Interestpaid, net of amounts capitalized, was $2.9 million and $5.2 million for the sixmonths ended February 28, 2010 and 2009, respectively and $1.7 million and$4.1 million for the three months ended February 28, 2010 and 2009,respectively.  Interest capitalized was $..2 million and $ .4 million for the six months ended February 28, 2010 and2009, respectively and $ .1 million and $ .2 million for the three months endedFebruary 28, 2010 and 2009, respectively.

 

**Note7:  Derivative Instruments and HedgingActivities**

 

The Company, as aresult of its operating and financing activities, is exposed to changes inforeign currency exchange rates and interest rates which may adversely affectits results of operations and financial position.  In seeking to minimize the risks and/or costsassociated with such activities, the Company may enter into derivativecontracts.

 

The Companymanages its foreign currency related risks primarily through the use of foreigncurrency forward contracts. The contracts held by the Company are denominatedin Euros. The Company has entered into foreign currency forward contracts thatare designated as cash flow hedges of exchange rate risk related to foreigncurrency-denominated purchases of equipment. At February 28, 2010, the Company had cash flow hedges forapproximately 154,000 Euros with a maturity date of October 15, 2010.  At February 28, 2010, the fair value ofthe open contracts was a loss of approximately $8,000 recorded in accumulatedother comprehensive income/(loss) in members’ equity.  Amounts deferred to accumulated othercomprehensive income/(loss) will be reclassified into the cost of the equipmentwhen the actual purchase takes place.

 

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The Company isexposed to interest risk primarily through its borrowing activities.  On December 24, 2009, the Companyentered into an interest rate swap contract associated with a $27.3 million taxexempt variable rate demand bond issue that matures on September 1,2019.  The interest rate swap contractrequires payment of a fixed interest rate of 2.827 % and the receipt of avariable rate of interest based on the Securities Industry and Financial MarketAssociation (SIFMA) index of .208 % as of February 28, 2010 on $27.3million of indebtedness. The Company has designated this interest rate swapcontract as a cash flow hedge.  As of February 28,2010, the fair value of the cash flow hedge, which is a loss of approximately$374,000, is deferred to accumulated other comprehensive income/(loss) and willbe reclassified to interest expense over the life of the swap contract. Noineffectiveness was recognized in earnings during the quarter ended February 28,2010.  The current period loss of$129,000 is classified as interest expense on the statements ofoperations.  As of February 28,2010, $641,000 of deferred net losses on the interest rate swap contractcontained in accumulated other comprehensive income/(loss) are expected to bereclassified to earnings during the next 12 months.

 
| ** **                                     | ** ** | **Liability Derivatives as of February 28** | ** ** |
|------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                     | ** ** | ** **                                       | ** ** | **Fair Value (In Thousands)** | ** ** |
| ** **                                     | ** ** | **Balance Sheet Location**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| Derivatives Designated as Hedging Instruments: |       |                                             |       |   |   |   |   |
| Foreign Currency Forward Contracts             |       | Other  Current Liabilities                       |       | $ | 8 |   | $ | 173 |   |
| Interest Rate Contracts                        |       | Other  Long-Term Liabilities                     |       | 374 |   | — |   |
|                                           |       |                                             |       |   |   |   |   |
| Total Derivatives                              |       |                                             |       | $ | 382 |   | $ | 173 |   |

 

**Note8:  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 be processed for a given cropyear.  The net proceeds from theoperations of Sidney Sugars is based on the forecasted net income for thefiscal year and the percentage of the tons of non-member sugarbeets processedto the total estimated tons of non-member sugarbeets to be processed for agiven 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.

 

**Note9: ****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 28,2010 and 2009:

 

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***Components of Net Periodic PensionCost***

(In Thousands)

 
| ** **                          | ** ** | **For the Six Months Ended  February 28** | ** ** | **For the Three Months Ended  February 28** | ** ** |
|-------------------------------------|------------|------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                          | ** ** | **2010**                                       | ** ** | **2009**                                         | ** ** | **2010** | ** ** | **2009** | ** ** |
| Service Cost                        |       | $                                              | 1,816      |                                             | $          | 2,099 |   | $ | 908 |   | $ | 1,049 |   |
| Interest Cost                       |       | 4,563                                          |       | 5,337                                            |       | 2,282 |   | 2,668 |   |
| Expected Return on Plan Assets      |       | (4,962                                         | )          | (7,729                                           | )          | (2,481 | ) | (3,864 | ) |
| Amortization of Prior Service Costs |       | 658                                            |       | 822                                              |       | 329 |   | 411 |   |
| Amortization of Net Actuarial Loss  |       | 3,470                                          |       | 35                                               |       | 1,735 |   | 18 |   |
| FAS 158 Measurement Date Adjustment |       | —                                         |       | (113                                             | )          | — |   | (56 | ) |
| Net Periodic Pension Cost           |       | $                                              | 5,545      |                                             | $          | 451 |   | $ | 2,773 |   | $ | 226 |   |

 

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

(In Thousands)

 
| ** **                         | ** ** | **For the Six Months Ended  February 28** | ** ** | **For the Three Months Ended  February 28** | ** ** |
|------------------------------------|------------|------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                         | ** ** | **2010**                                       | ** ** | **2009**                                         | ** ** | **2010** | ** ** | **2009** | ** ** |
| Service Cost                       |       | $                                              | 484        |                                             | $          | 484 |   | $ | 242 |   | $ | 242 |   |
| Interest Cost                      |       | 927                                            |       | 944                                              |       | 464 |   | 472 |   |
| Amortization of Net Actuarial Gain |       | (344                                           | )          | (338                                             | )          | (172 | ) | (169 | ) |
| Net Periodic Post-Retirement Cost  |       | $                                              | 1,067      |                                             | $          | 1,090 |   | $ | 534 |   | $ | 545 |   |

 

TheCompany has made contributions to the pension plans of approximately $2.5million during the six months ended February 28, 2010 and is anticipating making totalcontributions of approximately $4.3 million to the pension plans during thisfiscal year.  The Company has contributedand made benefit payments of approximately $50,000 related to the SupplementalExecutive Retirement Plans during the six months ended February 28, 2010.  The Company expects to contribute and makebenefit payments totaling approximately $99,000 this fiscal year related to theSupplemental Executive Retirement Plans.

 

TheCompany has contributed and made benefit payments of approximately $571,000 related to the post-retirement plans duringthe six months ended February 28, 2010. The Company expects to contributeand make benefit payments of approximately $1.0 million related to thepost-retirement plans during the current fiscal year.

 

**Note10:  Members’ Investments**

 
| ** **              | ** ** | ** **    | ** ** | **Shares**     | ** ** | **Shares Issued**     | ** ** |
|-------------------------|------------|---------------|------------|----------------|------------|-----------------------|------------|
| ** **              | ** ** | **Par Value** | ** ** | **Authorized** | ** ** | **& Outstanding** | ** ** |
| Preferred  Stock:       |       |          |       |           |       |                  |       |
| April 8,  2010     |       | $             | 76.77      |           | 600,000    |                  | 498,570    |   |
| February 28,  2010 |       | $             | 76.77      |           | 600,000    |                  | 498,570    |   |
| August 31,  2009   |       | $             | 76.77      |           | 600,000    |                  | 498,570    |   |
| February 28,  2009 |       | $             | 76.77      |           | 600,000    |                  | 498,570    |   |
|                    |       |          |       |           |       |                  |       |
| Common  Stock:          |       |          |       |           |       |                  |       |
| April 8,  2010     |       | $             | 10.00      |           | 4,000      |                  | 2,778      |   |
| February 28,  2010 |       | $             | 10.00      |           | 4,000      |                  | 2,788      |   |
| August 31,  2009   |       | $             | 10.00      |           | 4,000      |                  | 2,812      |   |
| February 28,  2009 |       | $             | 10.00      |           | 4,000      |                  | 2,803      |   |

 

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**Note 11: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 $77.5 million and $82.7 million for the six months ended February 28, 2010 and 2009,respectively and $37.0 million and $35.2 million for the three months ended February 28, 2010 and 2009,respectively.

 

**Note 12: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, 2010 and 2009, is shown below:

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

 
| ** **                          | ** ** | **For the Six Months Ended February 28, 2009  (Dollars In Thousands)** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **Sugar**                                                                   | ** ** | **Leasing** | ** ** | **Consolidated** | ** ** |
| Net Revenue from External Customers |       | $                                                                           | 584,580    |   | $ | 12,007 |   | $ | 596,587 |   |
| Gross Proceeds                      |       | $                                                                           | 514,650    |   | $ | 6,422 |   | $ | 521,072 |   |
| Depreciation and Amortization       |       | $                                                                           | 29,689     |   | $ | 5,585 |   | $ | 35,274 |   |
| Interest Income                     |       | $                                                                           | 117        |   | $ | 1 |   | $ | 118 |   |
| Interest Expense                    |       | $                                                                           | 5,345      |   | $ | — |   | $ | 5,345 |   |
| Income from Equity Method Investees |       | $                                                                           | 10         |   | $ | — |   | $ | 10 |   |
| Other Income/(Expense), Net         |       | $                                                                           | 4,558      |   | $ | (140 | ) | $ | 4,418 |   |
| Consolidated Net Proceeds           |       | $                                                                           | 331,777    |   | $ | 6,243 |   | $ | 338,020 |   |
|                                |       |                                                                        |       |   |   |   |   |
| Capital Additions                   |       | $                                                                           | 13,161     |   | $ | 1,057 |   | $ | 14,218 |   |

 

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

 
| ** **                          | ** ** | **For the Three Months Ended February 28, 2009  (Dollars In Thousands)** | ** ** |
|-------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **Sugar**                                                                     | ** ** | **Leasing** | ** ** | **Consolidated** | ** ** |
| Net Revenue from External Customers |       | $                                                                             | 267,750    |   | $ | 5,782 |   | $ | 273,532 |   |
| Gross Proceeds                      |       | $                                                                             | 255,807    |   | $ | 2,991 |   | $ | 258,798 |   |
| Depreciation and Amortization       |       | $                                                                             | 14,731     |   | $ | 2,791 |   | $ | 17,522 |   |
| Interest Income                     |       | $                                                                             | 9          |   | $ | — |   | $ | 9 |   |
| Interest Expense                    |       | $                                                                             | 2,918      |   | $ | — |   | $ | 2,918 |   |
| Income from Equity Method Investees |       | $                                                                             | 5          |   | $ | — |   | $ | 5 |   |
| Other Income/(Expense), Net         |       | $                                                                             | (46        | ) | $ | (140 | ) | $ | (186 | ) |
| Consolidated Net Proceeds           |       | $                                                                             | 181,588    |   | $ | 2,833 |   | $ | 184,421 |   |
|                                |       |                                                                          |       |   |   |   |   |
| Capital Additions                   |       | $                                                                             | 8,292      |   | $ | 307 |   | $ | 8,599 |   |

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

 
| ** **                  | ** ** | **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 |   |

 

**Note 13:Fair Value of Financial Instruments**

 

Fairvalue is defined as the price that would be received for an asset or paid totransfer a liability (an exit price) in the principal or most advantageousmarket for the asset or liability in an orderly transaction between marketparticipants on the measurement date.  Quotedmarket prices are generally not available for the Company’s financialinstruments.  Fair values are based onjudgments regarding anticipated cash flows, future expected loss experience,current economic conditions, risk characteristics of various financialinstruments and other factors.  Theseestimates involve uncertainties and matters of 

 

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judgment,and therefore, cannot be determined with precision.  Changes in assumptions could significantlyaffect the estimates.

 

*Long-Term Debt, Inclusiveof Current Maturities* - Based upon current borrowing rates withsimilar maturities, the fair value of the long-term debt as of February 28,2010 was approximately $136.9 million in comparison to the carrying value of$142.4 million.

 

*Foreign Currency ForwardContracts* — Based on a variety of pricing factors, whichinclude the market price of the foreign currency forward contract available inthe dealer-market, the fair value of the open contracts as of February 28,2010 was a loss of approximately $8,000.

 

*Interest Rate Contracts* — Based on thezero coupon method in which the term, notional amount, and repricing date of theinterest rate swap match the term, repricing date, and principal amount of theinterest-bearing liability on which the hedging interest payments are due, thefair value of the interest rate contract as of February 28, 2010 was aloss of approximately $374,000.

 

*Investments in CoBank, ACB and Investments in Marketing Cooperatives* - The Companybelieves it is not practical to estimate the fair value of these investmentswithout incurring excessive costs because there is no established market forthese securities and equity interests, and it is inappropriate to estimatefuture cash flows which are largely dependent on future earnings of theseorganizations.

 

**Note 14:Environmental Matters**

 

The Company is subject toextensive federal and state environmental laws and regulations with respect towater and air quality, solid waste disposal and odor and noise control.  The Company conducts an ongoing complianceprogram designed to meet these environmental laws and regulations.  The Company believes that it is in substantialcompliance with applicable environmental laws and regulations.  From time to time, however, the Company maybe involved in investigations or determinations regarding matters that mayarise in the ordinary course of business. The Company works closely with all affected government agencies toresolve environmental issues that have arisen and believes such issues will beresolved without any material adverse effect on the Company.

 

TheCompany’s sugar manufacturing process is energy intensive and generates carbondioxide and other “Greenhouse Gases” (GHGs). Several bills have been passed or introduced in the United States Senateand House of Representatives that would regulate GHGs and carbon dioxideemissions to reduce the impact of global climate change.  The Company believes it is likely thatindustries generating GHGs, including the Company, will be subject to eitherfederal or state regulation relating to climate change policies in therelatively near future.  These policies,if adopted, will increase the Company’s energy and other operating costs.  Depending on how these policies addressimports, the domestic sugar market may have a competitive disadvantage comparedwith imported sugar.  These policiescould have a significant negative impact on the Company’s beet payment toshareholders if the Company is not able to pass the increased costs on to theCompany’s customers****.****

 

On June 26th,2009, the House of Representatives passed H.R. 2454, the American Clean Energyand Security Act (ACES), a bill that will place a cap on GHG emissions.  Similar legislation isbeing considered in the U.S. Senate.  Separately, the EnvironmentalProtection Agency (EPA) finalized findings that GHG emissions endanger publichealth and welfare through their impact on climate change, and that motorvehicles “cause or contribute” to dangerous GHG pollution.  The findings,which respond to the Supreme Court’s 2007 decision in *Massachusetts v. EPA*, legally obligatesthe EPA to issue GHG standards for motor vehicles under the Clean Air Act andsupports the EPA’s effort to use existing legal authority to regulateGHGs.  As an emitter of GHGs covered by ACES, the Company is watchinglegislative developments carefully yet cannot predict whether new proposedregulations will have a material impact on the Company.

 

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, Minnesota factories.  As part of the stipulation agreement, theCompany has agreed to make certain capital expenditures over the subsequentthree years and implement specified changes in 

 

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operatingprocedures to contain hydrogen sulfide emissions at the Minnesota factories.The Company is on schedule with the agreed to changes.

 

Includingthe expenditures related to the MPCA stipulation agreement, the Company hasidentified capital expenditures for environmental related projects over thenext three years at the Company’s factory locations of approximately $21.2million.

 

**Note 15:Legal Matters**

 

On September 21,2009 the U.S. District Court (District Court) ruled against the U.S. Departmentof Agriculture (USDA) finding that the USDA violated federal law by failing toprepare an Environmental Impact Statement (EIS) before deregulating RoundupReady® sugarbeets.  On January 19, 2010,a motion was filed in Federal Court seeking a preliminary injunction to haltthe planting and processing of Roundup Ready® sugarbeets for both the seed androot crops.  On March 16, 2010 theU.S. District Court denied the plaintiffs’ request for the preliminaryinjunction.  While there is always somepossibility of interim developments, the Company believes it is unlikely thatthere will be any interference with the 2010 commercial root crop.

 

The District Court hasscheduled a hearing for July of 2010 regarding remedies that will beimposed while the EIS is being completed. The timing of the hearing is subjectto change by the District Court.  Theresults of this hearing will determine the actual direct impact of the decisionon the Company and its sugarbeet producers. There is no way to predict how the District Court will rule in theremedy phase.  It is possible that theDistrict Court could in some way restrict the use of Roundup Ready® sugarbeetseed for the seed and/or commercial root crops pending completion of theEIS.  The number of years required tocomplete the EIS is currently uncertain.

 

**Note16: Subsequent Events**

 

TheCompany has evaluated events through the date that the financial statementswere issued for potential recognition or disclosure in the February 28,2010 financial statements.

 

TheCompany is currently evaluating the provisions of the Health Care and EducationReconciliation Act of 2010 which was enacted into law on March 25,2010.  The Company does not currentlyknow the impact that this legislation will have on the Company’s financialcondition or on its results of operations.

 

**Item 2.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations forthe Six Months and Three Months Ended February 28, 2010 and 2009**

** **

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 2009 Form 10-K.

 

**OVERVIEW**

 

The harvest of the Red River Valley and Sidney sugarbeet crops grownduring 2009 and to be processed during fiscal 2010 produced a total of10.5 million tons of sugarbeets, or approximately 22.5 tons of sugarbeetsper acre from approximately 467,000 acres. This represents a decrease in total tons harvested of approximately 1.9percent compared to the 2008 crop.  Thesugar content of the 2009 crop is 16.7 percent as compared to the 17.6 percentsugar content of the 2008 crop.  TheCompany expects to produce a total of approximately 28.1 millionhundredweight of sugar from the 2009 crop, a decrease of approximately 8.3percent compared to the 2008 crop.

 

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Net proceeds attributable to American Crystal Sugar Company for fiscal2010 is expected to be approximately 15 percent lower than in fiscal 2009.  This expected decrease is primarily due tofewer tons harvested and a decline in the sugar content of the sugarbeetsresulting in the decreased production of sugar and agri-products. Alsocontributing to this expected decrease are lower anticipated net selling pricesfor agri-products and increased operating costs. These anticipated decreaseswill be partially offset by anticipated higher net selling prices for sugar.

 

**RESULTSOF OPERATIONS**

 

**Comparisonof the Six Months Ended February 28, 2010 and 2009**

 

Revenuefor the six months ended February 28, 2010, was $587.8 million, a decrease of $8.8million from the six months ended February 28, 2009. The table below reflects the percentage changes in product revenues,prices and volumes for the six months ended February 28, 2010, as compared to thesix months ended February 28, 2009.

 
| **Product** | ** ** | **Revenue** | ** ** | **Selling Price** | ** ** | **Volume** | ** ** |
|-------------|------------|-------------|------------|-------------------|------------|------------|------------|
| Sugar       |       | 1.2         | %          | 10.0              | %          | -8.0       | %          |
| Pulp        |       | -13.9       | %          | -25.3             | %          | 15.2       | %          |
| Molasses    |       | -1.5        | %          | 14.7              | %          | -14.1      | %          |
| CSB         |       | -11.8       | %          | -7.3              | %          | -4.9       | %          |
| Betaine     |       | 7.6         | %          | 28.0              | %          | -15.9      | %          |

 

Theincreases in selling prices for sugar, molasses and betaine reflect strongmarkets due to supply and demand factors. The decrease in the selling price ofpulp is the result of lower prices for competing alternative products in themarketplace.  The decreases in thevolumes of sugar and molasses sold are primarily due to the timing ofdeliveries this year as compared to the previous year.  The increase in the volume of pulp soldreflects the impact of more product availability due to higher beginninginventories and increased production of pulp this year as compared to theprevious year.  The decreases in thevolumes of CSB and betaine sold are primarily due to lower production thisyear.

 

Rentalrevenue on the ProGold operating lease was $12.2 million and $12.0 million forthe six months ended February 28, 2010 and 2009,respectively.

 

Costof sales for the six months ended February 28, 2010, exclusive of paymentsto members for sugarbeets, decreased $30.1 million as compared to the sixmonths ended February 28, 2009.  This decrease wasprimarily 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 29, 2010 was $191.1 million ascompared to an increase of $149.6 million for the previous year’s six monthperiod ended February 28, 2009 resulting in a $ 41.5 million favorable change in the cost ofsales between the two years as shown in the table below:

 

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

 
| ** **                                                   | ** ** | **For the Six Months Ended February 28** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------------|------------|
| **(In  Millions)**                                           | ** ** | **2010**                                      | ** ** | **2009** | ** ** | **Change** | ** ** |
| Beginning Product Inventories at Net Realizable  Value       |       | $                                             | (137.6     | ) | $ | (150.6 | ) | $ | 13.0 | (1) |
| Ending Product Inventories at Net Realizable Value           |       | 328.7                                         |       | 300.2 |   | 28.5 | (2) |
| Increase in the Net Realizable Value of Product  Inventories |       | $                                             | 191.1      |   | $ | 149.6 |   | $ | 41.5 |   |

 

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(1) The change isprimarily due to a 26 percent decrease in the hundredweight of sugar inventoryas of August 31, 2009 as compared to August 31, 2008 partially offsetby a 14 percent increase in the per hundredweight net

 

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realizable value of sugarinventory as of August 31, 2009 as compared to August 31, 2008, a 172percent increase in the tons of pulp inventory as of August 31, 2009 ascompared to August 31, 2008 and a 68 percent increase in the per ton netrealizable value of pulp inventory as of August 31, 2009 as compared to August 31,2008.

(2) The change isprimarily due to a 15 percent increase in the per hundredweight net realizablevalue of sugar inventory as of February 28, 2010 as compared to February 28,2009 partially offset by a 48 percent decrease in the per ton net realizablevalue of pulp inventory as of February 28, 2010 as compared to February 28,2009.

 

·                  Due to lower than anticipated sugarproduction and inventory levels during the first quarter of last 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 were $7.7 millionhigher for the six months ended February 28, 2009, as compared to the sixmonths ended February 28, 2010.

·                  Factory operating costs increased $4.4million for the six months ended February 28, 2010, as compared to the sixmonths ended February 28, 2009, primarily due to higher labor andbenefits, coke and purchased power costs partially offset by decreased naturalgas costs.

·                  The cost recognized associated with thenon-member sugarbeets increased $14.6 million for the six months ended February 28,2010, when compared to the six months ended February 28, 2009.  This increase was primarily due to anincrease in tons of sugarbeets harvested this year.

 

Selling,general and administrative expenses decreased $6.2 million for the six monthsended February 28, 2010, as compared to the six months ended February 28,2009.  Selling expenses decreased $7.3million primarily due to the decreased freight costs resulting from lower salesvolumes.  General and administrativeexpenses increased $1.1 million due to general cost increases.

 

Interestexpense decreased $ .9 million for the six months ended February 28, 2010,as compared to the six months ended February 28, 2009.  This was primarily due to decreased shortterm and long term average borrowing levels and lower short term and long termaverage interest rates.

 

OtherIncome/(Expense), Net decreased $4.5 million for the six months ended February 28,2010, as compared to the six months ended February 28, 2009.  This was due primarily to the one-timereceipt of $4.8 million in November 2008 related to a legal settlement.

 

Netproceeds attributable to American Crystal Sugar Company decreased $1.8 millionfor the six months ended February 28, 2010, as compared to the six months ended February 28,2009.  Payments to/due members forsugarbeets decreased $3.7 million due to a lower forecasted gross beet paymentfor the 2009 crop as compared to that forecasted for the 2008 crop at this timelast year partially offset by an increase in the tons of sugarbeets processedduring the six months ended February 28, 2010, as compared to the six months ended February 28,2009.  Non-member business activitiesresulted in a gain of $2.7 million for the six months ended February 28,2010 as compared to a gain of $ .8 million for the six months ended February 28,2009.  The increase of $1.9 million wasprimarily related to the activities of Sidney Sugars.

 

**Comparisonof the Three Months Ended February 28, 2010 and 2009**

 

Revenuefor the three months ended February 28, 2010, was $268.4 million, a decrease of $5.2million from the three months ended February 28, 2009. The table below reflects the percentage changes in product revenues,prices and volumes for the three months ended February 28, 2010, as compared to thethree months ended February 28, 2009.

 
| **Product** | ** ** | **Revenue** | ** ** | **Selling Price** | ** ** | **Volume** | ** ** |
|-------------|------------|-------------|------------|-------------------|------------|------------|------------|
| Sugar       |       | 4.2         | %          | 13.3              | %          | -8.0       | %          |
| Pulp        |       | -27.9       | %          | -33.8             | %          | 8.9        | %          |
| Molasses    |       | 59.3        | %          | -0.6              | %          | 60.3       | %          |
| CSB         |       | 7.0         | %          | -6.5              | %          | 14.4       | %          |
| Betaine     |       | 3.7         | %          | 16.8              | %          | -11.3      | %          |

 

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Theincreases in selling prices for sugar and betaine reflect strong markets due tosupply and demand factors. The decrease in the selling price of pulp is theresult of lower prices for competing alternative products in the marketplace.  The decrease in the volume of sugar soldreflects the impact of less product availability due to lower beginninginventories this quarter as compared to the previous year.  The increase in the volume of pulp soldreflects the impact of more product availability due to higher beginning inventoriesand increased production of pulp this year as compared to the previousyear.  The increase in the volume ofmolasses and CSB sold reflects the impact of more product availability thisquarter due to increased production. The decline in the volume of betaine soldis primarily due to lower production this quarter.

 

Rentalrevenue on the ProGold operating lease was $5.8 million for each of the threemonths ended February 28, 2010 and 2009.

 

Costof sales for the three months ended February 28, 2010, exclusive of payments to members forsugarbeets, decreased $17.9 million as compared to the three months ended February 28, 2009.  This decrease was primarily related to thefollowing:

·                  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, 2010 was $125.6 million ascompared to an increase of $91.6 million for the previous year’s three monthperiod ended February 28, 2009 resulting in a $34.0 million favorablechange in the cost of sales between the two years as shown in the table below:

 

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

 
| ** **                                                   | ** ** | **For the Three Months Ended February 28** | ** ** |
|--------------------------------------------------------------|------------|-------------------------------------------------|------------|
| **(In  Millions)**                                           | ** ** | **2010**                                        | ** ** | **2009** | ** ** | **Change** | ** ** |
| Beginning Product Inventories at Net Realizable  Value       |       | $                                               | (203.1     | ) | $ | (208.6 | ) | $ | 5.5 | (1) |
| Ending Product Inventories at Net Realizable Value           |       | 328.7                                           |       | 300.2 |   | 28.5 | (2) |
| Increase in the Net Realizable Value of Product  Inventories |       | $                                               | 125.6      |   | $ | 91.6 |   | $ | 34.0 |   |

 

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(1) The change isprimarily due to a 7.8 percent decrease in the hundredweight of sugar inventoryas of November 30, 2009 as compared to November 30, 2008 partiallyoffset by a 5.7 percent increase in the per hundredweight net realizable valueof sugar inventory.

(2) The change isprimarily due to a 15.1 percent increase in the per hundredweight netrealizable value of sugar inventory as of February 28, 2010 as compared toFebruary 28, 2009 partially offset by a 48.4 percent decrease in the perton net realizable value of pulp inventory as of February 28, 2010 ascompared to February 28, 2009.

 

·                  In order to fulfill our customer’s needs on atimely basis, the Company’s sugar marketing agent, United Sugars Corporation,purchased and sold additional sugar during the three months ended February 28,2010.  As a result, the costs associatedwith purchased sugar were $1.6 million higher for the three months ended February 28,2010, as compared to the three months ended February 28, 2009.

·                  Factory operating costs increased $1.3million for the three months ended February 28, 2010, as compared to thethree months ended February 28, 2009, due to general cost increases.

·                  The cost recognized associated with thenon-member sugarbeets increased $13.3 million for the three months ended February 28,2010, when compared to the three months ended February 28, 2009.  This increase was due to an increase in tonsof sugarbeets harvested this year and an increased per ton beet payment.

 

Selling,general and administrative expenses increased $ .5 million for the three monthsended February 28, 2010, ascompared to the three months ended February 28, 2009. General andadministrative expenses increased $ .8 million due to general costincreases.  Selling expenses decreased $..3 million primarily due to the decreased freight costs resulting from lowersugar sales volume.

 

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Interestexpense decreased $ .5 million for the three months ended February 28,2010, as compared to the three months ended February 28, 2009.  This was primarily due to decreased shortterm and long term average borrowing levels and lower short term and long termaverage interest rates.

 

Net proceeds attributable to American Crystal Sugar Company increased$2.5 million for the three months ended February 28, 2010, as compared to thethree months ended February 28, 2009. Payments to/due members for sugarbeets increased $2.3 million primarilydue to a larger increase in the forecasted gross beet payment for the 2009 cropduring the second quarter this year as compared to the increase in theforecasted gross beet payment for the 2008 crop during the second quarter lastyear.  Non-member business activitiesresulted in a gain of $ .7 million for the three months ended February 28, 2010 as compared to a gainof $ .5 million for the three months ended February 28, 2008.  The increase was primarily related to theactivities of Sidney Sugars.

 

**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.

 

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

 

Duringthe current national economic downturn and financial market instability, theCompany, due to its strong financial position and relationships with itslenders, has continued to secure the necessary financing for its workingcapital requirements and capital expenditures.

 

TheCompany has a seasonal line of credit through July 30, 2012, with aconsortium of lenders led by CoBank, ACB of $320.0 million, against whichthere was no outstanding balance as of February 28, 2010 and a line ofcredit with Wells Fargo Bank for $1.0 million, against which there was nooutstanding balance as of February 28, 2010.  The Company’s commercial paper programprovides short-term borrowings of up to $320 million of which approximately$150.0 million was outstanding as of February 28, 2010.  The Company had $2.9 million of short-termletters of credit outstanding as of February 28, 2010.  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, 2010, was $168.1 million.

 

TheCompany also has long-term debt availability through December 31, 2011,with CoBank, ACB of****$156.6 million,of which $22.3 million in loans and $70.8 million in long-term letters ofcredit were outstanding as of February 28, 2010.  The unused long-term line of credit as of February 28, 2010 was$63.5 million.  In addition, the Company hadlong-term debt outstanding, as of February 28, 2010, of $50.0 millionfrom a private placement of Senior Notes that occurred in September of1998 and $70.1 million from five separate issuances of Pollution Controland Industrial Development Revenue Bonds.

 

TheCompany had outstanding purchase commitments totaling $13.6 million as of February 28,2010, for equipment and construction contracts related to various capitalprojects.

 

Theliquidity changes that have occurred in the Company’s financial statements fromAugust 31, 2009, to February 28, 2010, 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 

 

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campaign;the final payments to growers for sugarbeets delivered from the previous year’scrop; and the initial payments to growers for sugarbeets delivered from thecurrent year’s crop.

 

Thenet cash used by operations was $35.6 million for the six months ended February 28,2010, as compared to $105.6 million for the six months ended February 28,2009.  This decrease in the use of cash of$70.0 million was primarily the result of the following:

 

·                  Reflected in the change in the net cashprovided by operating activities is a net cash increase of $1.5 million fromthe prior year which was the result of a decrease in the forecasted member grossbeet payment of $3.7 million and decreased costs of $6.6 million partiallyoffset by a decrease in revenue of $8.8 million.

·                  There was a net favorable change in assetsand liabilities of $68.0 million primarily comprised of the following:

·                  The decrease in cash used related to theAmount Due Growers of $49.4 million was due to a reduction in the current year’stotal estimated grower payment based on a reduction in tons harvested and alower estimated per ton member grower payment this year as compared to thistime last year. Also adding to this decrease was a larger increase in theforecasted grower payment this year during the second quarter.

·                  The decrease in cash used related to changesin advances to related parties of $11.3 million was primarily due to the timingof the cash requirements of our marketing agents.

·                  The decrease in cash used related to changesin accrued continuing costs of $24.0 million was the result of a difference inthe timing of revenues and expenses between the two years.

·                  The decrease in cash used related to changesin accounts payable of $2.4 million, $3.3 in other liabilities and $2.2 innon-current pension asset/liabilities is due to the timing of payments.

·                  These decreases in cash used were partiallyoffset by an increase in receivables of $15.2 million due to the timing ofcollections.

·                  An increase in cash used related to thechange in inventories of $8.3 million was primarily due to a $37.7 millionincrease in finished product inventories related to an increased net realizablevalue per hundredweight of sugar. This was partially offset by a $29.5 milliondecrease in the value of unprocessed sugarbeets, primarily the result of lesstons of unprocessed sugarbeets remaining this year as compared to this timelast year.

 

Thenet cash used in investing activities was $26.3 million for the six monthsended February 28, 2010, ascompared to $18.7 million for the six months ended February 28, 2009.  The increase of $7.6 million was primarilydue to increased purchases of property and equipment.

 

Thenet cash provided by financing activities was $62.1 million for the six monthsended February 28, 2010, as compared to $124.3 million for the six monthsended February 28, 2009.  Thisdecrease of $62.1 million was primarily due to decreased net proceeds fromshort-term debt of $70.4 million partially offset by decreased payment of unitretains of $7.8 and decreased distributions to Noncontrolling Interests of $ .7million.

 

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.

 

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**OTHER**

 

**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 CCC, with repayment of such funds secured by sugar.  If the price of sugar drops below theforfeiture price, the processors can forfeit the sugar securing the loans tothe CCC in lieu of repayment.  Processorsmay also obtain CCC loans for “in-process” sugar or syrups at 80 percent of theloan 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 remained at 18.00cents/lb in 2008 and will gradually rise to 18.75 cents by 2011, and they willremain at 18.75 cents/lb for the 2012 crop year.  Refined beet sugar loan rates were 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.

 

TheUSDA has historically maintained raw and refined sugar prices above theforfeiture price without cost to the U.S. Treasury by regulating the supply ofsugar in the U.S. market through management of a tariff rate quota system.  Currently, forty exporting countries retainguaranteed preferential access to the U.S. market under World TradeOrganization (WTO) and Free Trade Agreement (FTA) rules.  Mexico’s access has been unlimited since January 1,2008.  The Farm Bill sets a minimumoverall allotment quantity for U.S. producers at no less than 85% of domesticconsumption and provides a market balancing mechanism if there is an oversupplyin the domestic sugar market.  If theSecretary of Agriculture determines there is an oversupply of sugar, the newmarket balancing mechanism requires the Secretary to divert the excess sugarfrom sugar producers to ethanol producers while minimizing the cost to the U.STreasury.  Although the market balancingmechanism will provide sustainability to the sugar industry in the short term,there is no assurance that the sugar-to-ethanol program will be in place afterthe Farm Bill 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 ofsugar the Company can sell into the domestic market.  The Company’s marketing allocation for the2009 crop is currently set at approximately 35 million hundredweight.  The Company’s allocation may reduce orincrease the amount of sugar the Company can market for a given year, thusaffecting the number of acres of sugarbeets required for processing to producethat amount of sugar.

 

### **North American 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.  During the year ended September 30,2008, Mexico exported approximately 

 

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13million hundredweight of sugar into the United States.  During the year ended September 30,2009, Mexico exported approximately 26 million hundredweight of sugar into theUnited States.  The Company has no way topredict the extent to which Mexico will take advantage of its exportopportunities**.**

 

### **Regional and Bilateral Free Trade Agreements**

 

TheUnited States government may continue to pursue international tradeagreements.  The Company monitors theU.S. government’s international trade policy because it may lead to additionalcommitments 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 Association ofSoutheast Asian Nations, South Africa, Thailand, and others.  The Company believes these agreements, ifthey reach fruition, could negatively impact the Company’s profitability.  If increases in guaranteed access orreductions in sugar tariffs are included in these agreements, excess sugar fromthese regions could enter the U.S. market and reduce domestic sugar prices.

 

ThePeru Free Trade Agreement became effective on February 1, 2009.  Under this agreement, sugar trade with Peruis subject to a net surplus producer requirement.  Peru, typically a net importer, is unlikelyto meet that requirement most years.

 

Negotiationshave been completed on the U.S.-Colombian Free Trade Agreement and theU.S.-Panama Free Trade Agreement but they have not been ratified by the U.S.Congress.  The U.S.-Colombian Free TradeAgreement would allow Colombia to export into the U.S. an additional 1.0million cwt of sugar above its traditional WTO level of 521,000 cwt.  The U.S.-Panama Free Trade Agreement wouldallow Panama to export into the U.S. an additional 144,000 cwt of sugar aboveits traditional WTO level of 629,000 cwt. The Company does not know when thesetrade agreements will be brought before Congress 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 and are taking steps to attempt topositively influence the outcome.  TheCompany and the sugar industry intend to continue to focus significant attentionon 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 itsshareholders.

 

**Environmental**

 

The Company is subject toextensive federal and state environmental laws and regulations with respect towater and air quality, solid waste disposal and odor and noise control.  The Company conducts an ongoing complianceprogram designed to meet these environmental laws and regulations.  The Company believes that it is insubstantial compliance with applicable environmental laws and regulations.  From time to time, however, the Company maybe involved in investigations or determinations regarding matters that mayarise in the ordinary course of business. The Company works closely with all affected government agencies toresolve environmental issues that have arisen and believes such issues will beresolved without any material adverse effect on the Company.

 

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TheCompany’s sugar manufacturing process is energy intensive and generates carbondioxide and other “Greenhouse Gases” (GHGs). Several bills have been passed or introduced in the United States Senateand House of Representatives that would regulate GHGs and carbon dioxideemissions to reduce the impact of global climate change.  The Company believes it is likely thatindustries generating GHGs, including the Company, will be subject to eitherfederal or state regulation relating to climate change policies in therelatively near future.  These policies,if adopted, will increase the Company’s energy and other operating costs.  Depending on how these policies addressimports, the domestic sugar market may have a competitive disadvantage comparedwith imported sugar.  These policiescould have a significant negative impact on the Company’s beet payment toshareholders if the Company is not able to pass the increased costs on to theCompany’s customers****.****

 

On June 26th,2009, the House of Representatives passed H.R. 2454, the American Clean Energyand Security Act (ACES), a bill that will place a cap on GHG emissions.  Similar legislation isbeing considered in the U.S. Senate.  Separately, the EnvironmentalProtection Agency (EPA) finalized findings that GHG emissions endanger publichealth and welfare through their impact on climate change, and that motorvehicles “cause or contribute” to dangerous GHG pollution.  The findings,which respond to the Supreme Court’s 2007 decision in *Massachusetts v. EPA*, legally obligatesthe EPA to issue GHG standards for motor vehicles under the Clean Air Act andsupports the EPA’s effort to use existing legal authority to regulateGHGs.  As an emitter of GHGs covered by ACES, the Company is watchinglegislative developments carefully yet cannot predict whether new proposedregulations will have a material impact on the Company.

 

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 thesubsequent three years and implement specified changes in operating proceduresto contain hydrogen sulfide emissions at the Minnesota factories. The Companyis on schedule with the agreed to changes.

 

Includingthe expenditures related to the MPCA stipulation agreement, the Company hasidentified capital expenditures for environmental related projects over thenext three years at the Company’s factory locations of approximately $21.2million.

 

**Item 3.  Quantitative andQualitative 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 4T.  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, 2010.  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 

 

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chiefexecutive officer and the chief financial officer, as appropriate to allowtimely decisions regarding required disclosure. There were no changes in the Company’s internal controls over financialreporting that occurred during the Company’s most recent fiscal quarter thatmay have materially affected, or are reasonably likely to materially affect,the Company’s internal 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 andpotential claims of which the Company is aware, the Company’s management believesthat (i) the Company has insurance protection to cover all or a portion ofany judgments which may be rendered against the Company with respect to certainclaims or actions and (ii) any judgments which may be entered against theCompany and which may exceed such insurance coverage or which may arise inactions involving potential liabilities not covered by insurance policies arenot likely to have a material adverse effect upon the Company, or its assets oroperations.

 

On September 21,2009 the U.S. District Court (District Court) ruled against the U.S. Departmentof Agriculture (USDA) finding that the USDA violated federal law by failing toprepare an Environmental Impact Statement (EIS) before deregulating RoundupReady® sugarbeets.  On January 19,2010, a motion was filed in Federal Court seeking a preliminary injunction tohalt the planting and processing of Roundup Ready® sugarbeets for both the seedand root crops.  On March 16, 2010the U.S. District Court denied the plaintiffs’ request for the preliminaryinjunction.  While there is always somepossibility of interim developments, the Company believes it is unlikely thatthere will be any interference with the 2010 commercial root crop.

 

The District Court hasscheduled a hearing for July of 2010 regarding remedies that will beimposed while the EIS is being completed. The timing of the hearing is subjectto change by the District Court.  Theresults of this hearing will determine the actual direct impact of the decisionon the Company and its sugarbeet producers. There is no way to predict how the District Court will rule in theremedy phase.  It is possible that theDistrict Court could in some way restrict the use of Roundup Ready® sugarbeetseed for the seed and/or commercial root crops pending completion of theEIS.  The number of years required tocomplete the EIS is currently uncertain.

 

**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 2009 Annual Report on Form 10-K.

 

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

 

None

 

**Item3.  Defaults Upon Senior Securities**

 

None

 

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

 

The Company held meetingsin December 2009 with its shareholders from the Hillsboro Factory and the MoorheadFactory districts.

 

At the HillsboroFactory Districtmeeting held on December 3, 2009, the shareholders elected David Mueller as a director.  He received 41 of the 42 votes cast.  His three-year term begins December 3,2009 and expires in December 2012.  Mr. Muellerhas been a sugarbeet farmer near Cummings, North Dakota since 1985.  Mr. Mueller previously served on the RedRiver Valley Sugarbeet Growers Association Boards’ Executive Committee and astreasurer of its Research and Education Board. Mr. Mueller replaces Francis L. Kritzberger who was unableto stand for re-election due to the provisions of the Company Bylaws whichprohibit a person from serving more than four consecutive three year terms as adirector.  John Brainard and Jeff D. McInnes will continue asdirectors for the Hillsboro Factory District.

 

At the Moorhead FactoryDistrict meeting held on December 3,2009, the shareholders elected Wayne Tang as a director. He received 66 of the 76 votes cast with one abstention.  His three-year term begins December 3,2009 and expires in December 2012.  Mr. Tanghas been a farmer since 1972.  Mr. Tangcurrently serves on the American Sugarbeets Growers Association Board ofDirectors and was most recently Vice Chairman of the Red River Valley SugarbeetGrowers Association’s Executive Committee. Mr. Tang replaces Richard Borgen who was unable to stand forre-election due to the provisions of the Company Bylaws which prohibit a personfrom serving more than four consecutive three year terms as a director. William A. Hejl and Dale Kuehl will continue as directors for theMoorhead Factory District.

 

**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          |       | Registrant’s  Senior Note Purchase Agreement                                          |       | Incorporated by  reference to Exhibit 10.24 from the Company’s Annual Report on  Form 10-K for the year ended August 31, 1999                                       |
|          |       |                                                                                       |       |                                                                                                                                                                                    |
| 10.3          |       | Registrant’s  Senior Note Inter-creditor and Collateral Agency Agreement              |       | Incorporated by  reference to Exhibit 10.25 from the Company’s Annual Report on  Form 10-K for the year ended August 31, 1999                                       |
|          |       |                                                                                       |       |                                                                                                                                                                                    |
| 10.4          |       | Registrant’s  Senior Note Restated Mortgage and Security Agreement                    |       | Incorporated by  reference to Exhibit 10.26 from the Company’s Annual Report on  Form 10-K for the year ended August 31, 1999                                       |
|          |       |                                                                                       |       |                                                                                                                                                                                    |
| ++10.5        |       | Long Term Incentive  Plan, dated June 23, 1999                                        |       | Incorporated by  reference to Exhibit 10.31 from the Company’s Annual Report on  Form 10-K for the year ended August 31, 2000                                       |
|          |       |                                                                                       |       |                                                                                                                                                                                    |
| 10.6          |       | Registrant’s  Senior Note Purchase Agreement dated January 15, 2003              |       | Incorporated by  reference to Exhibit 10.29 from the Company’s Form 10-Q for the  quarter ended February 28, 2003                                                   |
|          |       |                                                                                       |       |                                                                                                                                                                                    |
| ++10.7        |       | Long Term Incentive Plan, dated August 24, 2005                                       |       | Incorporated by reference to Exhibit 10.25 from  the Company’s Annual Report on Form 10-K for the year ended  August 31, 2005                                       |

 

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| ++10.8  |   | Employment Agreement dated March 21, 2007 between the Registrant  and David A. Berg.                                                           |   | Incorporated by  reference to Exhibit 10.26 from the Company’s Form 10-Q for the  quarter ended February 28, 2007.            |
|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                |   |                                                                                                                                              |
| 10.9    |   | Growers’ Contract (5-year Agreement) for the crop years  2008 through 2012                                                                     |   | Incorporated by reference to Exhibit 10.24 from  the Company’s Annual Report on Form 10-K for the year ended  August 31, 2007 |
|    |   |                                                                                                                                                |   |                                                                                                                                              |
| 10.10   |   | Amended and Restated Uniform Member Sugar Marketing  Agreement between the Registrant and United Sugars Corporation dated  September 20, 2007. |   | Incorporated by reference to Exhibit 10.22 from  the Company’s Annual Report on Form 10-K for the year ended  August 31, 2008 |
|    |   |                                                                                                                                                |   |                                                                                                                                              |
| 10.11   |   | Stipulation Agreement between Registrant and State  of Minnesota Pollution Control Agency, dated November 25, 2008                             |   | Incorporated by reference to Exhibit 10.19 from  the Company’s Form 10-Q for the quarter ended November 30, 2008              |
|    |   |                                                                                                                                                |   |                                                                                                                                              |
| ++10.12 |   | Restated Supplemental Executive Retirement Plan,  dated December 5, 2008                                                                       |   | Incorporated by reference to Exhibit 10.20 from  the Company’s Form 10-Q for the quarter ended November 30, 2008              |
|    |   |                                                                                                                                                |   |                                                                                                                                              |
| ++10.13 |   | Restated Board of  Directors Deferred Compensation Plan, dated December 8, 2008                                                                |   | Incorporated by  reference to Exhibit 10.21 from the Company’s Form 10-Q for the  quarter ended November 30, 2008             |
|    |   |                                                                                                                                                |   |                                                                                                                                              |
| ++10.14 |   | First Amendment to 2005  Long-Term Incentive Plan, dated December 20, 2006.                                                                    |   | Incorporated by  reference to Exhibit 10.22 from the Company’s Form 10-Q for the  quarter ended February 28, 2009             |
|    |   |                                                                                                                                                |   |                                                                                                                                              |
| ++10.15 |   | Second Amendment to  2005 Long-Term Incentive Plan, dated November 5, 2007.                                                                    |   | Incorporated by  reference to Exhibit 10.23 from the Company’s Form 10-Q for the  quarter ended February 28, 2009             |
|    |   |                                                                                                                                                |   |                                                                                                                                              |
| ++10.16 |   | Third Amendment to 2005  Long-Term Incentive Plan, dated December 11, 2008.                                                                    |   | Incorporated by  reference to Exhibit 10.24 from the Company’s Form 10-Q for the  quarter ended February 28, 2009             |
|    |   |                                                                                                                                                |   |                                                                                                                                              |
| 10.17   |   | Amended and Restated  Credit Agreement between the Registrant and CoBank, ACB dated July 30,  2009.                                            |   | Incorporated by reference to Exhibit 10.17 from  the Company’s Annual Report on Form 10-K for the year ended  August 31, 2009 |
|    |   |                                                                                                                                                |   |                                                                                                                                              |
| 10.18   |   | Amended and Restated Uniform Member Marketing  Agreement between the Registrant and Midwest Agri-Commodities Company dated  September 1, 2009. |   | Incorporated by reference to Exhibit 10.18 from  the Company’s Annual Report on Form 10-K for the year ended  August 31, 2009 |
|    |   |                                                                                                                                                |   |                                                                                                                                              |
| 10.19   |   | Amended and Restated Member Control Agreement  between Registrant and Golden Growers Cooperative dated September 1,  2009.                     |   | Incorporated by reference to Exhibit 10.19 from  the Company’s Annual Report on Form 10-K for the year ended  August 31, 2009 |
|    |   |                                                                                                                                                |   |                                                                                                                                              |
| 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, 2009  |

 

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| 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, 2010** | ** **                         | **/s/ Teresa Warne** |
| ** ** | ** **              | **Teresa Warne**                   |
| ** ** | ** **              | **Corporate Controller,**          |
| ** ** | ** **              | **Chief Accounting Officer**       |
| ** ** | ** **              | **Duly  Authorized Officer**       |
|            |                         |                                    |  |  |

 

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