**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-K**

** **

**(Mark One)**

**x**                              AnnualReport Pursuant to Section 13 or 15(d) of the Securities Exchange Act of1934

**Forthe fiscal year ended December 31, 2006**

**o**                                 TransitionReport Pursuant to Section 13 or 15(d) of the Securities Act of 1934

**Commission file number 0-50711**

**Northern Growers, LLC**

(Exact name of registrant as specified in its charter)

| **South Dakota**                                                 |   | **77-0589881**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or Other  Jurisdiction of  Incorporation or Organization) |   | (I.R.S. Employer  Identification No.) |

 

**48416144th StreetP.O. Box 356Big Stone City SD 57216605-862-7902**

(Address ofPrincipal Executive Offices) (Zip Code)

 

**(605)862-7902**

(Issuer’sTelephone Number, Including Area Code)

 

Securities registeredunder Section 12(b) of the Exchange Act:

**None**

 

Securitiesregistered under Section 12(g) of the Exchange Act:

**Class ACapital Units**

** **

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined inRule 405 of the Securities Act.o Yes    þ No

Indicateby check mark if the registrant is not required to file reports pursuant toSection 13 or Section 15(d) of the Act.o Yes    þ No

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.     þ Yes    o No

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K (§229.405 of this chapter) is not contained in this form, and nodisclosure will be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference inPart III of this Form 10-K or any amendment to this Form 10-K     þ
| Indicate by check mark  whether the registrant is a large accelerated filer, an accelerated filer, or  a non-accelerated filer. See definition of accelerated filer and large  accelerated filer in Rule 12b-2 of the Exchange Act). |                                 |                                |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------|-------------------------------------|
| o  Large  Accelerated Filer                                                                                                                                                                                                     | þ  Accelerated  Filer | o  Non-Accelerated  Filer |   |   |
|                                                                                                                                                                                                                                           |                                      |                                     |  |  |

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Act).o Yes     þ No

Theaggregate market value of the registrant’s common stock held by non-affiliatesat June 30, 2006 was approximately $120,070,000. The aggregate market value wascomputed by reference to the last sales price during the registrant’s mostrecently completed second fiscal quarter.

Indicatethe number of shares outstanding of each of the registrant’s classes of commonstock, as of the latest practicable date. As of the date of this filing, therewere 50,628,000 Class A capital units of the registrant outstanding.

**DOCUMENTS INCORPORATED BY REFERENCE**

PartIII of Form 10-K - Portions of the Information Statement for 2007 AnnualMeeting of Members.

 

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**CAUTIONARY STATEMENT REGARDINGFORWARD-LOOKING INFORMATION**

This Annual Report on Form 10-K and other reportsissued by Northern Growers, LLC (including reports filed with the Securitiesand Exchange Commission (the “SEC” or “Commission”), contain “forward-lookingstatements” that deal with future results, expectations, plans andperformance.  Forward-looking statements may include statements which usewords such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “predict,”“hope,” “will,” “should,” “could,” “may,” “future,” “potential,” or thenegatives of these words, and all similar expressions. These forward-lookingstatements are made based on our expectations and beliefs concerning futureevents affecting us and are subject to uncertainties and factors relating toour operations and business environment, all of which are difficult to predictand many of which are beyond our control, that could cause our actual resultsto differ materially from those matters expressed in or implied by theseforward-looking statements. We do not undertake any responsibility to releasepublicly any revisions to these forward-looking statements to take into accountevents or circumstances that occur after the date of this prospectus.Additionally, we do not undertake any responsibility to update you on theoccurrence of any unanticipated events which may cause actual results to differfrom those expressed or implied by the forward-looking statements contained inthis Annual Report.  Important factorsthat could cause actual results to differ materially from our expectations aredisclosed under “Risk Factors” and elsewhere in this report. As statedelsewhere in this report such factors include, among others:

·                                          Changesin ethanol supply and demand;

·                                          Changesin the weather or general economic conditions impacting the availability andprice of commodities, particularly corn and natural gas;

·                                          Theavailability and cost of raw materials for the production process, particularlyfor corn, naural gas, steam, and water;

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•                                        Theresults of risk management or hedging strategies;

•                                        Competitionfrom alternative fuels and alternative fuel additives;

•                                        Fluctuationsin United States oil consumption and petroleum prices;

•                                        Changesin business strategy, capital improvements or development plans;

•                                        Theavailability of additional capital to support capital improvements anddevelopment;

•                                        Changesor developments in laws, regulations or taxes in the ethanol, agricultural orenergy industries;

•                                        Damageto or loss of the plant due to casualty, weather, mechanical failure or anyextended or extraordinary maintenance or inspection that may be required;

•                                        Anincrease in environmental regulation and scrutiny from federal and stategovernments; and

•                                        Otherfactors discussed below under the item entitled “Risk Factors.”

We are not under any duty to update theforward-looking statements contained in this report, nor do we guarantee futureresults or performance or what future business conditions will be like. Wecaution you not to put undue reliance on any forward-looking statements, whichspeak only as of the date of this report.

### **PART I**

**Item 1.    Business.**

**Overview**

Northern Growers, LLC (“Northern Growers”) is a SouthDakota limited liability company that owns and manages a 77.16% interest in itssubsidiary, Northern Lights Ethanol, LLC (“Northern Lights”).  Broin Investments I, LLC owns the remainingminority interest in Northern Lights. (Northern Growers and Northern Lights arealso referred to collectively in this report as “we,” “our,” or “us”). NorthernGrowers is owned by 859 members who principally reside in South Dakota,Minnesota, and immediately surrounding states. Northern Growers’ business primarily consists of owning and managing itsinterest in Northern Lights, a South Dakota limited liability company, whichowns and operates an ethanol plant near Big Stone City, South Dakota (the “plant”).

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**Reorganization**

Northern Growers was originally formed as a SouthDakota cooperative on April 14, 2000.  The purpose of the cooperativewas to own and manage a 77.16% interest in Northern Lights and to supply cornto the plant.  As a cooperative, Northern Growers was entitled tosingle-level, pass-through tax treatment on income generated through members’patronage. This allowed Northern Growers to pass income onto its members in theform of distributions without first paying taxes at the company level, similarto the taxation of a partnership. As the cooperative’s board of directorsbecame aware of certain disadvantages in remaining as a cooperative, the boardof directors approved a plan to reorganize into a South Dakota limitedliability company.

The reorganization from a cooperative to a limitedliability company became effective on April 1, 2003 following approval ofthe reorganization by Northern Growers’ members. The transaction was anexchange of interests whereby the assets and liabilities of the cooperativewere transferred for capital units of the newly formed limited liabilitycompany, Whetstone Ethanol, LLC. The capital units were distributed to NorthernGrowers’ members upon dissolution of the cooperative at a rate of one capitalunit of the limited liability company for each share of equity stock owned inthe cooperative. The distribution of capital units to the members wasregistered under the Securities Act of 1933. Upon completion of thereorganization, the name, Whetstone Ethanol, LLC, was changed to NorthernGrowers, LLC.  As a limited liability company, Northern Growers elected tobe taxed as a partnership in order to retain its historic single-level incometax treatment at the member level.

**The Plant**

The plant is a dry-mill processing facility, locatedimmediately adjacent to Big Stone Plant near the city of Big Stone City inGrant County, South Dakota.  The plant was designed and built in July 2002by Broin and Associates, Inc. of Sioux Falls, South Dakota, a division of theBroin Companies, LLC, specializing in the design and construction of ethanolplants.  The plant was originally builtwith a name-plate production capacity of 40 million gallons of ethanolannually. In June 2007, Broin and Associates expects to complete theconstruction of a major expansion of the plant, increasing the name-platecapacity to 75 million gallons annually. The plant’s day-to-day operations are managed by Broin Management, LLC,a division of the Broin Companies, LLC, specializing in the management andoperation of ethanol plants.

The plant is essentially a fermentationplant.  The corn supplied to the plant is ground and then mixed withwater to form a mash.  The mash is heated and enzymes added toconvert the starch into fermentable sugars.  Fermentation occurs whenyeast is added to convert the sugars into alcohol and carbon dioxide. Fermentation produces a mixture called “beer,” which contains about 10% alcoholand 90% water.  The “beer” is then boiled in a distillation column toseparate the water, resulting in ethyl alcohol that is 90% to 95% pure. The mixture then goes through a dehydration process, which increases thealcohol content to 99% or greater.  This product is then mixed with acertified denaturant to make the product unfit for human consumption andcommercially saleable.

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**PrincipalProducts**

The principal products produced at our plant are fuelgrade ethanol and distillers grains.

***Ethanol***

Ethanol is ethyl alcohol.  Ethanol is produced from starch orsugar-based feed products such as corn, potatoes, wheat, and sorghum, as wellas from agricultural waste products including sugar, rice straw, cheese whey,beverage wastes and forestry and paper wastes. Historically, corn has been theprimary source of producing ethanol because of its relatively low cost, wideavailability and ability to produce large quantities of carbohydrates thatconvert into glucose more easily than other products.  Today, approximately90% of the ethanol produced in the United States is produced from corn.

Ethanol is used for three primary purposes: 1) as anoxygenated fuel additive; 2) as an octane enhancer in fuels; and 3) as anon-petroleum based gas substitute. Approximately 95% of all ethanol is usedfor blending with unleaded gasoline and other fuel products. Ethanol has beenutilized as a fuel additive since the late 1970s when its value as a productextender for gasoline was discovered during the OPEC oil embargo crisis. In the 1980s, ethanol began to see widespread use as an octane enhancer,replacing other environmentally harmful components in gasoline such as lead andbenzene.  Ethanol’s use as an oxygenate continued to increase with thepassage of the Clean Air Act Amendments of 1990, which required the addition ofoxygenates to gasoline in the nation’s most polluted areas.  Becauseethanol contains approximately 35% oxygen, its combination with gasolineincreases the percentage of oxygen in gasoline.  As a result, the gasolineburns cleaner and releases less carbon monoxide and other exhaust emissionsinto the atmosphere.

***Distillers Grains***

A principal co-product of the ethanol productionprocess is distillers grains.  Distillers grains are a high protein, highenergy feed supplement marketed primarily to the dairy, beef, sheep, swine, andpoultry industries. It is a popular animal feed supplement, with millionsof tons produced in North America annually.  Most of the distillers grainsproduced in the United States are sold for use in animal feeds within thecontinental United States, and a small percentage is exported primarily toCanada, Mexico and Europe.

Dry mill ethanol processing produces generally threeforms of distillers grains, all of which differ in moisture content and shelflife: 1) dried distillers grains with solubles (DDGS); 2) distillers wetgrains or “wet cake”; and 3) modified distillers grains.  Distillers wetgrains are processed corn mash that does not go through a drying process andcontains approximately 70% moisture content.  Distillers wet grains have ashort shelf life of approximately three days and can be sold only to livestockproducers within the immediate vicinity of the plant.  Modified distillersgrains are distillers wet grains that have been dried to a 50% moisturecontent.  Modified distillers grains have a slightly 

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longershelf life and are often sold to nearby livestock producers. DDGS is distillerswet grains that are dried to an 8-10% moisture content. DDGS have an almostindefinite shelf life and may be sold and shipped to any market regardless ofits vicinity to the plant.

**Marketingand Distribution**

***Ethanol***

All of the ethanol produced at the plant is sold toEthanol Products, LLC, a division of Broin Enterprises, Inc., under an ethanolmarketing agreement.  Ethanol Products, in turn, markets and sells theethanol to major, multi-national oil companies with blending and refineryfacilities located throughout the continental United States. The price receivedfrom the sale to Ethanol Products is based upon various types of contractsbetween the plant and Ethanol Products and is fixed upon the transfer of titleto Ethanol Products.

The ethanol produced at the plant is shipped byEthanol Products using rail cars operated by Ethanol Products or truckssupplied by companies with which Ethanol Products contracts.  Transfer oftitle and risk of loss is made to Ethanol Products upon the loading of ethanolonto the railcars and trucks at the plant.  The plant is served by rail facilitiesand connections to the Burlington Northern Santa Fe railroad system, whichfacilitate the transportation of ethanol to the customers’ terminals.  Theplant is also served by multiple South Dakota state highways and InterstateHighway 29, which provide transportation links in all directions.

The marketing agreement with Ethanol Products is ineffect until July 2007, renewing automatically for five-year terms unlesseither party provides at least ninety days written notice of termination priorto the end of the term.  Ethanol Products charges a marketing and servicefee based upon each gallon of ethanol sold. Shipping costs in transporting theethanol are borne by the plant and are included in our gross revenues and costof revenues.  In the event that the contractual relationship with EthanolProducts is interrupted for any reason, we believe that another entity tomarket the ethanol could be located.  Any interruption, however, couldtemporarily disrupt the sale of ethanol and adversely affect our business and operations.

***Distillers Grains***

All of the distillers grains produced at the plant aresold to customers through Dakota Gold Marketing, Inc., a division of BroinEnterprises, Inc., under a distillers grains marketing agreement. As the plant’sexclusive marketing agent, Dakota Gold markets and sells the distillers grainsproduced at the plant to customers primarily located throughout the continentalUnited States. The price received from the sale of distillers grain is theprice received from the customers with which Dakota Gold Marketing hasnegotiated and entered a sale.

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There are three variations of distillers grainsproduced at the plant and marketed by Dakota Gold Marketing: 1) DDGS; 2) DakotaGoldTM; and 3) distillers wet grains. Dakota GoldTM is DDGS that is certified byDakota Gold Marketing indicating DDGS meets certain standards andspecifications. In 2006, approximately 78% of our revenues from the sale ofdistillers grains were attributable to sales of Dakota GoldTM.

Dakota Gold Marketing markets Dakota GoldTM, DDGS anddistillers wet grains to local, regional, and national markets.  The plantships the majority of Dakota GoldTM and DDGS to national markets, which areprimarily located in the southwestern United States, and the rest to local andregional markets.  Shipments to national markets are primarily done byrail because of a longer shelf life, and shipments to local or regional marketsare primarily done by truck.  We also contract with Dakota Gold Marketingfor the use of railcars in the shipping of DDGS and Dakota GoldTM, paying DakotaGold Marketing a flat fee per railcar in connection with eachshipment. Through the marketing of Dakota Gold, we are not dependent uponone or a limited number of customers.

 The marketing agreement with Dakota GoldMarketing is in effect until March 2012, renewing automatically for additionalfive-year terms unless discontinued by either party upon at least three monthsprior written notice.  Dakota Gold Marketing charges the plant a marketingfee based upon a percentage of gross monthly sales of distillers grains lessshipping costs. All shipping costs associated with transporting distillersgrains from the plant to customers are borne by the plant and are included inour gross revenues and cost of revenues, and Dakota Gold Marketing isresponsible for invoicing all loads and receiving payments from the customers,the payment of which is remitted to the plant.

**Wind**

Independent of the plant’s operations, NorthernGrowers is continuing to study the feasibility of entering the wind-generationbusiness. In 2005, Northern Growers provided Northern Wind, LLC, a South Dakotalimited liability company, a non-interest bearing loan in the amount of$52,000, the purpose of which was to assist Northern Wind in the study of windgeneration in northeastern South Dakota. Northern Wind is currently analyzingthe feasibility of developing wind-generation facilities within Grant andRoberts counties, South Dakota.

**Risk Management**

Due to fluctuations in the price of corn and naturalgas, we use risk management or hedging strategies to minimize our commodityrisk.  Hedging is a means of protecting the price that we will buy cornand natural gas in the future.  All of the commodity risk managementservices relating to corn and natural gas are provided by Broin Managementunder a corn and natural gas risk management agreement.   This agreement is in effect untilJanuary 2012, renewing automatically for additional five-year terms unlessdiscontinued by either party upon written notice prior to the expiration of theterm.

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**Dependence Upon a Single or Few Customers**

We, as discussed above, are substantially dependentupon Ethanol Products for the purchase, marketing and distribution of ethanol.Ethanol Products purchases 100% of the ethanol produced at the plant, all ofwhich is marketed and distributed to its customers.

**Sources and Availability of Raw Materials**

**Corn**. The major rawmaterial needed to produce ethanol and distillers grains at the plant iscorn.  To operate at a name-plate capacity of 75 million gallons ofethanol annually, the plant requires the supply of approximately 26.5 millionbushels of corn annually.  All of the plant’s corn requirements arepurchased on the open market from local producers and storage elevators.  The plant’s location in Grant County, SouthDakota, is expected to continue to provide a sufficient supply of corn to meetthe bushel requirement through 2007.  In 2006, approximately 6.4 millionbushels of corn were produced in Grant County and 32.6 million bushels of cornwere produced in the nearby South Dakota counties of Codington, Day, Deuel,Hamlin, and Roberts.  Another 37.1 million bushels were produced in thenearby Minnesota counties of Big Stone and Lac Qui Parle.

**Steam.** Theproduction process at the plant requires a constant supply of steam. Steam is used for the cooking, evaporation, and distillation processes. While steam for the ethanol production process is generally received from anethanol plant’s on-site boilers, the plant receives a substantial portion ofits steam directly from Big Stone Plant, a coal fired, electrical generatingfacility located immediately adjacent to the plant, and co-owned by Otter TailCorporation, Montana-Dakota Utilities and NorthWestern Corporation.  Inthe event that additional steam is necessary or the supply of steam from BigStone Plant is unexpectedly diminished or interrupted, the plant uses twoon-site boilers to produce steam. The energy source to power the two on-siteboilers and other machinery is natural gas. However,****the use of steam from Big Stone Plant reduces the plant’sdependence on natural gas for operations.  In 2006, for example, 48% ofthe plant’s natural gas requirements for operations were replaced directly withsteam from Big Stone Plant, compared to 40% of the plant’s requirements in2005.

The steam sale agreement with Big Stone Plant providessteam to the plant up to a maximum of 140 thousand pounds of steam perhour.  The agreement’s ten year term ends on June 1, 2012, butautomatically renews for two additional five-year terms unless terminated byeither party by providing 12 months advance notice. Big Stone Plant has generallyprovided the plant with a consistent supply of steam to meet its requirementsexcept during routine, semi-annual maintenance shutdowns.

**Natural Gas**. The productionprocess at the plant requires a constant supply of natural gas.  Naturalgas is the primary energy source for drying distillers grains. It is primarilyresponsible for powering the two on-site boilers for the production of steam inthe event that additional steam is necessary or the supply of steam from BigStone Plant is unexpectedly diminished or interrupted. The plant contracts withNorthWestern Corporation of Sioux Falls, South Dakota, for the supply anddistribution of natural gas to

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the plant. The agreement with NorthWestern is for a term of ten years ending in2012.  Since the plant’s operations were commenced, there have been nomaterial interruptions or shortages in the supply of natural gas to the plant.

**Electricity**. Theproduction process at the plant requires a constant supply ofelectricity.  Electricity is necessary for lighting purposes and poweringmuch of the machinery and equipment at the plant.  The plant contractswith Otter Tail Power Company of Otter Tail, Minnesota, to provide all theelectric power and energy requirements for the plant.  The agreementcommenced at the start of plant operations in 2002 under an initial one-yearterm, but automatically renews for additional one-year terms unless terminatedby 12 months advance written notice from either party.  Since operationswere commenced, there have been no interruptions or shortages in the supply ofelectricity to the plant.

**Water**. Theproduction process at the plant requires a constant supply of water. Water is necessary for the slurry and cooking processes, cooling towers andboiler operations.  The plant contracts with the city of Big Stone Cityand Big Stone Plant to supply the necessary water requirements for theproduction process.  The agreement with the city of Big Stone City is ineffect until 2012, and automatically renews for two, five-year terms unlessterminated by either party with 12 months advance written notice.  Sincethe plant’s operations were commenced, the city of Big Stone City and Big StonePlant have provided an ample and consistent supply of water to meet the plant’srequirements.

**Research and Development**

We do not conduct any research and development of ourown relating to the production of ethanol and distillers grains. Instead, werely on Broin Research, Inc., a division of Broin and Associates, to researchand develop new technologies in order to improve the production process and endproducts. Under a license agreement dated October 25, 2005, Broin Researchlicenses to us the right to use certain technology and patents owned,developed, or obtained by Broin Research and which relate to the ethanol andco-product production processes. The agreement terminates on June 30, 2015, thesame date that the management agreement between the plant and Broin Managementis scheduled to expire.

**Competition**

We are in direct competition with numerous otherethanol and distillers grains producers, many of which have significantlygreater resources.  We expect that additional ethanol and distillersgrains producers will enter the market. The ethanol industry has grown to 113 production facilities in theUnited States as of February 2007, compared to 96 production facilities in theUnited States as of March 2006. The largest ethanol producers include AbengoaBioenergy Corp, Archer Daniels Midland, Aventine Renewable Energy, Cargill, USBioenergy and VeraSun Energy Corporation, all of which are capable of producingmore ethanol than the plant.  There are numerous ethanol plants 

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of asimilar size to the plant located in the Midwest region. In addition, at least77 new ethanol plants and 7 expanding plants, with a combined annual productioncapacity of over 3 billion gallons annually, are set to come into production inthe next 12 months, which will increase the ethanol production capacity ofcompetitors.  In South Dakota, excluding the plant, there are currently 12plants in full production, three of which are in an expansion phase, and fournew plants undergoing construction, all of which have a combined production capacityof approximately 900 million gallons.  Despite this concentration andgrowth, we believe that we will continue to compete favorably with otherethanol and distillers grains’ producers because of the plant’s existingefficiencies, the use of new technology from Broin Research, and the marketingarrangements with the companies owned and affiliated with Broin Companies.

The following table identifies most of the producersin the United States along with their production capacities.
| Company                            | ** ** | **Location**     | ** ** | **Feedstock** | ** ** | **Current  Capacity  (mgy)** | ** ** | **Under   Construction/  Expansions  (mgy)** |
|------------------------------------|------------|------------------|------------|---------------|------------|------------------------------|------------|----------------------------------------------|
| Abengoa Bioenergy  Corp.           |       | York, NE         |       | Corn/milo     |       | 55                           |       |                                         |
|                               |       | Colwich, KS      |       |          |       | 25                           |       |                                         |
|                               |       | Portales, NM     |       |          |       | 30                           |       |                                         |
|                               |       | Ravenna, NE      |       |          |       |                         |       | 88                                           |
| Aberdeen Energy*                   |       | Mina, SD         |       | Corn          |       |                         |       | 100                                          |
| Absolute Energy,  LLC*             |       | St. Ansgar, IA   |       | Corn          |       |                         |       | 100                                          |
| ACE Ethanol, LLC                   |       | Stanley, WI      |       | Corn          |       | 41                           |       |                                         |
| Adkins Energy,  LLC*               |       | Lena, IL         |       | Corn          |       | 40                           |       |                                         |
| Advanced  Bioenergy                |       | Fairmont, NE     |       | Corn          |       |                         |       | 100                                          |
| AGP*                               |       | Hastings, NE     |       | Corn          |       | 52                           |       |                                         |
| Agra Resources  Coop. d.b.a. EXOL* |       | Albert Lea, MN   |       | Corn          |       | 40                           |       | 8                                            |
| Agri-Energy, LLC*                  |       | Luverne, MN      |       | Corn          |       | 21                           |       |                                         |
| Alchem Ltd. LLLP                   |       | Grafton, ND      |       | Corn          |       | 10.5                         |       |                                         |
| Al-Corn Clean  Fuel*               |       | Claremont, MN    |       | Corn          |       | 35                           |       | 15                                           |
| Amaizing Energy,  LLC*             |       | Denison, IA      |       | Corn          |       | 40                           |       |                                         |
| Archer Daniels  Midland            |       | Decatur, IL      |       | Corn          |       | 1,070                        |       | 275                                          |
|                               |       | Cedar Rapids, IA |       | Corn          |       |                         |       |                                         |
|                               |       | Clinton, IA      |       | Corn          |       |                         |       |                                         |
|                               |       | Columbus, NE     |       | Corn          |       |                         |       |                                         |
|                               |       | Marshall, MN     |       | Corn          |       |                         |       |                                         |

 

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|                                   |   | Peoria, IL          |   | Corn        |   |   |   |   |
|-----------------------------------|--------|---------------------|--------|-------------|--------|--------|--------|--------|
|                              |   | Wallhalla, ND       |   | Corn/barley |   |   |   |   |
| Arkalon Energy,  LLC              |   | Liberal, KS         |   | Corn        |   |   |   | 110    |
| ASAlliances  Biofuels, LLC        |   | Albion, NE          |   | Corn        |   |   |   | 100    |
|                              |   | Linden, IN          |   | Corn        |   |   |   | 100    |
|                              |   | Bloomingburg, OH    |   | Corn        |   |   |   | 100    |
| Aventine  Renewable Energy, LLC   |   | Pekin, IL           |   | Corn        |   | 207    |   |   |
|                              |   | Aurora, NE          |   | Corn        |   |   |   |   |
| Badger State  Ethanol, LLC*       |   | Monroe, WI          |   | Corn        |   | 48     |   |   |
| Big River Resources,  LLC*        |   | West Burlington, IA |   | Corn        |   | 52     |   |   |
| Blue Flint  Ethanol               |   | Underwood, ND       |   | Corn        |   |   |   | 50     |
| Bonanza Energy,  LLC              |   | Garden City, KS     |   | Corn/milo   |   |   |   | 55     |
| Broin  Enterprises, Inc.*         |   | Scotland, SD        |   | Corn        |   | 11     |   |   |
| Bushmills  Ethanol, Inc.*         |   | Atwater, MN         |   | Corn        |   | 40     |   |   |
| Cardinal Ethanol                  |   | Harrisville, IN     |   | Corn        |   |   |   | 100    |
| Cargill, Inc.                     |   | Blair, NE           |   | Corn        |   | 85     |   |   |
|                              |   | Eddyville, IA       |   | Corn        |   | 35     |   |   |
| Cascade Grain                     |   | Clatskanie, OR      |   | Corn        |   |   |   | 108    |
| CassCo Amaizing  Energy, LLC      |   | Atlantic, IA        |   | Corn        |   |   |   | 110    |
| Castle Rock  Renewable Fuels, LLC |   | Necedah, WI         |   | Corn        |   |   |   | 50     |
| Center Ethanol  Company           |   | Sauget, IL          |   | Corn        |   |   |   | 54     |
| Central Indiana  Ethanol, LLC     |   | Marion, IN          |   | Corn        |   |   |   | 40     |
| Central Illinois  Energy, LLC     |   | Canton, IL          |   | Corn        |   |   |   | 37     |
| Central MN  Ethanol Coop*         |   | Little Falls, MN    |   | Corn        |   | 21.5   |   |   |
| Central Wisconsin  Alcohol        |   | Plover, WI          |   | Seed corn   |   | 4      |   |   |
| Chief Ethanol                     |   | Hastings, NE        |   | Corn        |   | 62     |   |   |
| Chippewa Valley  Ethanol Co.*     |   | Benson, MN          |   | Corn        |   | 45     |   |   |
| Commonwealth  Agri-Energy, LLC*   |   | Hopkinsville, KY    |   | Corn        |   | 33     |   |   |
| Corn, LP*                         |   | Goldfield, IA       |   | Corn        |   | 50     |   |   |
| Cornhusker Energy  Lexington, LLC |   | Lexington, NE       |   | Corn        |   | 40     |   |   |

 

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| Corn Plus, LLP*                          |   | Winnebago, MN     |   | Corn        |   | 44     |   |   |
|------------------------------------------|--------|-------------------|--------|-------------|--------|--------|--------|--------|
| Coshoctan  Ethanol, OH                   |   | Coshoctan, OH     |   | Corn        |   |   |   | 60     |
| Dakota Ethanol,  LLC*                    |   | Wentworth, SD     |   | Corn        |   | 50     |   |   |
| DENCO, LLC                               |   | Morris, MN        |   | Corn        |   | 21.5   |   |   |
| Dexter Ethanol,  LLC                     |   | Dexter, IA        |   | Corn        |   |   |   | 100    |
| E Energy Adams,  LLC                     |   | Adams, NE         |   | Corn        |   |   |   | 50     |
| E3 Biofuels                              |   | Mead, NE          |   | Corn        |   |   |   | 24     |
| E Caruso  (Goodland Energy Center)       |   | Goodland, KS      |   | Corn        |   |   |   | 20     |
| East Kansas  Agri-Energy, LLC*           |   | Garnett, KS       |   | Corn        |   | 35     |   |   |
| Elkhorn Valley  Ethanol, LLC             |   | Norfolk, NE       |   | Corn        |   |   |   | 40     |
| ESE Alcohol Inc.                         |   | Leoti, KS         |   | Seed corn   |   | 1.5    |   |   |
| Ethanol2000, LLP*                        |   | Bingham Lake, MN  |   | Corn        |   | 32     |   |   |
| Ethanol Grain  Processors, LLC           |   | Obion, TN         |   | Corn        |   |   |   | 100    |
| First United  Ethanol, LLC (FUEL)        |   | Mitchell Co., GA  |   | Corn        |   |   |   | 100    |
| Frontier Ethanol,  LLC                   |   | Gowrie, IA        |   | Corn        |   | 60     |   |   |
| Front Range  Energy, LLC                 |   | Windsor, CO       |   | Corn        |   | 40     |   |   |
| Gateway Ethanol                          |   | Pratt, KS         |   | Corn        |   |   |   | 55     |
| Glacial Lakes  Energy, LLC*              |   | Watertown, SD     |   | Corn        |   | 50     |   | 50     |
| Global  Ethanol/Midwest Grain Processors |   | Lakota, IA        |   | Corn        |   | 95     |   |   |
|                                     |   | Riga, MI          |   | Corn        |   |   |   | 57     |
| Golden Cheese  Company of California*    |   | Corona, CA        |   | Cheese whey |   | 5      |   |   |
| Golden Grain  Energy, LLC*               |   | Mason City, IA    |   | Corn        |   | 60     |   | 50     |
| Golden Triangle  Energy, LLC*            |   | Craig, MO         |   | Corn        |   | 20     |   |   |
| Grand River  Distribution                |   | Cambria, WI       |   | Corn        |   |   |   | 40     |
| Grain Processing  Corp.                  |   | Muscatine, IA     |   | Corn        |   | 20     |   |   |
| Granite Falls  Energy, LLC*              |   | Granite Falls, MN |   | Corn        |   | 52     |   |   |
| Great Plains  Ethanol, LLC*              |   | Chancellor, SD    |   | Corn        |   | 50     |   |   |
| Greater Ohio  Ethanol, LLC               |   | Lima, OH          |   | Corn        |   |   |   | 54     |

 

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| Green Plains Renewable Energy          |   | Shenandoah, IA   |   | Corn              |   |   |   | 50     |
|----------------------------------------|--------|------------------|--------|-------------------|--------|--------|--------|--------|
|                                   |   | Superior, IA     |   | Corn              |   |   |   | 50     |
| Hawkeye  Renewables, LLC               |   | Iowa Falls, IA   |   | Corn              |   | 105    |   |   |
|                                   |   | Fairbank, IA     |   | Corn              |   | 115    |   |   |
|                                   |   | Menlo, IA        |   | Corn              |   |   |   | 100    |
| Heartland Corn  Products*              |   | Winthrop, MN     |   | Corn              |   | 35     |   |   |
| Heartland Grain  Fuels, LP*            |   | Aberdeen, SD     |   | Corn              |   | 9      |   |   |
|                                   |   | Huron, SD        |   | Corn              |   | 12     |   | 18     |
| Heron Lake  BioEnergy, LLC             |   | Heron Lake, MN   |   | Corn              |   |   |   | 50     |
| Holt County  Ethanol                   |   | O’Neill, NE |   | Corn              |   |   |   | 100    |
| Horizon Ethanol,  LLC                  |   | Jewell, IA       |   | Corn              |   | 60     |   |   |
| Husker Ag, LLC*                        |   | Plainview, NE    |   | Corn              |   | 26.5   |   |   |
| Illinois River  Energy, LLC            |   | Rochelle, IL     |   | Corn              |   | 50     |   |   |
| Indiana  Bio-Energy                    |   | Bluffton, IN     |   | Corn              |   |   |   | 101    |
| Iowa Ethanol,  LLC*                    |   | Hanlontown, IA   |   | Corn              |   | 50     |   |   |
| Iroquois  Bio-Energy Company, LLC      |   | Rensselaer, IN   |   | Corn              |   | 40     |   |   |
| James Valley  Ethanol, LLC             |   | Groton, SD       |   | Corn              |   | 50     |   |   |
| KAAPA Ethanol, LLC*                    |   | Minden, NE       |   | Corn              |   | 40     |   |   |
| Kansas Ethanol,  LLC                   |   | Lyons, KS        |   | Corn              |   |   |   | 55     |
| Land O’ Lakes*                    |   | Melrose, MN      |   | Cheese whey       |   | 2.6    |   |   |
| Levelland/Hockley  County Ethanol, LLC |   | Levelland, TX    |   | Corn              |   |   |   | 40     |
| Lincolnland  Agri-Energy, LLC*         |   | Palestine, IL    |   | Corn              |   | 48     |   |   |
| Lincolnway  Energy, LLC*               |   | Nevada, IA       |   | Corn              |   | 50     |   |   |
| Liquid Resources  of Ohio              |   | Medina, OH       |   | Waste Beverage    |   | 3      |   |   |
| Little Sioux Corn  Processors, LP*     |   | Marcus, IA       |   | Corn              |   | 52     |   |   |
| Marquis Energy,  LLC                   |   | Hennepin, IL     |   | Corn              |   |   |   | 100    |
| Marysville  Ethanol, LLC               |   | Marysville, MI   |   | Corn              |   |   |   | 50     |
| Merrick &  Company                 |   | Golden, CO       |   | Waste beer        |   | 3      |   |   |
| MGP Ingredients,  Inc.                 |   | Pekin, IL        |   | Corn/wheat starch |   | 78     |   |   |
|                                   |   | Atchison, KS     |   |              |   |   |   |   |
| Michigan Ethanol,  LLC                 |   | Caro, MI         |   | Corn              |   | 50     |   |   |

 

11

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| Mid America Agri Products/Wheatland     |   | Madrid, NE         |   | Corn               |   |   |   | 44     |
|-----------------------------------------|--------|--------------------|--------|--------------------|--------|--------|--------|--------|
| Mid-Missouri  Energy, Inc.*             |   | Malta Bend, MO     |   | Corn               |   | 45     |   |   |
| Midwest Renewable  Energy, LLC          |   | Sutherland, NE     |   | Corn               |   | 25     |   |   |
| Millennium  Ethanol                     |   | Marion, SD         |   | Corn               |   |   |   | 100    |
| Minnesota Energy*                       |   | Buffalo Lake, MN   |   | Corn               |   | 18     |   |   |
| Missouri Ethanol                        |   | Laddonia, MO       |   | Corn               |   | 45     |   |   |
| Missouri Valley  Renewable Energy, LLC* |   | Meckling, SD       |   | Corn               |   |   |   | 60     |
| NEDAK Ethanol                           |   | Atkinson, NE       |   | Corn               |   |   |   | 44     |
| New Energy Corp.                        |   | South Bend, IN     |   | Corn               |   | 102    |   |   |
| North Country  Ethanol, LLC*            |   | Rosholt, SD        |   | Corn               |   | 20     |   |   |
| Northeast  Biofuels                     |   | Volney, NY         |   | Corn               |   |   |   | 114    |
| Northeast  Missouri Grain, LLC*         |   | Macon, MO          |   | Corn               |   | 45     |   |   |
| Northern Lights  Ethanol, LLC*          |   | Big Stone City, SD |   | Corn               |   | 50     |   |   |
| Northstar  Ethanol, LLC                 |   | Lake Crystal, MN   |   | Corn               |   | 52     |   |   |
| Northwest  Renewable, LLC               |   | Longview, WA       |   | Corn               |   |   |   | 55     |
| Otter Creek  Ethanol, LLC*              |   | Ashton, IA         |   | Corn               |   | 55     |   |   |
| Otter Tail Ag  Enterprises              |   | Fergus Falls, MN   |   | Corn               |   |   |   | 57.5   |
| Pacific Ethanol                         |   | Madera, CA         |   | Corn               |   | 35     |   |   |
|                                    |   | Boardman, OR       |   | Corn               |   |   |   | 35     |
|                                    |   | Burley, ID         |   | Corn               |   |   |   | 50     |
| Panda Energy                            |   | Hereford, TX       |   | Corn/milo          |   |   |   | 100    |
| Panhandle  Energies of Dumas, LP        |   | Dumas, TX          |   | Corn/Grain Sorghum |   |   |   | 30     |
| Parallel Products                       |   | Louisville, KY     |   | Beverage waste     |   | 5.4    |   |   |
|                                    |   | R. Cucamonga, CA   |   |               |   |   |   |   |
| Patriot  Renewable Fuels, LLC           |   | Annawan, IL        |   | Corn               |   |   |   | 100    |
| Penford Products                        |   | Ceder Rapids, IA   |   | Corn               |   |   |   | 45     |

 

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| Permeate Refining                       |   | Hopkinton, IA          |   | Sugars & starches |   | 1.5    |   |   |
|-----------------------------------------|--------|------------------------|--------|-----------------------|--------|--------|--------|--------|
| Phoenix Biofuels                        |   | Goshen, CA             |   | Corn                  |   | 25     |   |   |
| Pinal Energy, LLC                       |   | Maricopa, AZ           |   | Corn                  |   |   |   | 55     |
| Pine Lake Corn  Processors, LLC*        |   | Steamboat Rock, IA     |   | Corn                  |   | 20     |   |   |
| Pinnacle  Ethanol, LLC                  |   | Corning, IA            |   | Corn                  |   |   |   | 60     |
| Plainview  BioEnergy, LLC               |   | Plainview, TX          |   | Corn                  |   |   |   | 100    |
| Platinum  Ethanol, LLC*                 |   | Arthur, IA             |   | Corn                  |   |   |   | 110    |
| Plymouth  Ethanol, LLC*                 |   | Merrill, IA            |   | Corn                  |   |   |   | 50     |
| Prairie Ethanol,  LLC                   |   | Loomis, SD             |   | Corn                  |   | 60     |   |   |
| Prairie Horizon  Agri-Energy, LLC       |   | Phillipsburg, KS       |   | Corn                  |   | 40     |   |   |
| Premier Ethanol                         |   | Portland, IN           |   | Corn                  |   |   |   | 60     |
| Pro-Corn, LLC*                          |   | Preston, MN            |   | Corn                  |   | 42     |   |   |
| Quad-County Corn  Processors*           |   | Galva, IA              |   | Corn                  |   | 27     |   |   |
| Red Trail Energy,  LLC                  |   | Richardton, ND         |   | Corn                  |   | 50     |   |   |
| Redfield Energy,  LLC *                 |   | Redfield, SD           |   | Corn                  |   |   |   | 50     |
| Reeve Agri-Energy                       |   | Garden City, KS        |   | Corn/milo             |   | 12     |   |   |
| Renew Energy                            |   | Jefferson Junction, WI |   | Corn                  |   |   |   | 130    |
| Siouxland Energy  & Livestock Coop* |   | Sioux Center, IA       |   | Corn                  |   | 25     |   | 40     |
| Siouxland  Ethanol, LLC                 |   | Jackson, NE            |   | Corn                  |   |   |   | 50     |
| Sioux River  Ethanol, LLC*              |   | Hudson, SD             |   | Corn                  |   | 50     |   |   |
| Southwest Iowa  Renewable Energy, LLC * |   | Council Bluffs, IA     |   | Corn                  |   |   |   | 110    |
| Sterling Ethanol,  LLC                  |   | Sterling, CO           |   | Corn                  |   | 42     |   |   |
| Summit Ethanol                          |   | Leipsic, OH            |   | Corn                  |   |   |   | 60     |
| Tall Corn  Ethanol, LLC*                |   | Coon Rapids, IA        |   | Corn                  |   | 49     |   |   |
| Tama Ethanol,  LLC                      |   | Tama, IA               |   | Corn                  |   |   |   | 100    |
| Tate & Lyle                         |   | Loudon, TN             |   | Corn                  |   | 67     |   | 38     |
|                                    |   | Ft. Dodge, IA          |   | Corn                  |   |   |   | 105    |
| The Andersons  Albion Ethanol LLC       |   | Albion, MI             |   | Corn                  |   | 55     |   |   |
| The Andersons  Clymers Ethanol, LLC     |   | Clymers, IN            |   | Corn                  |   |   |   | 110    |
| The Andersons  Marathon Ethanol, LLC    |   | Greenville, OH         |   | Corn                  |   |   |   | 110    |

 

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| Trenton Agri Products, LLC                                   |   | Trenton, NE       |   | Corn              |   | 40           |   |        |
|--------------------------------------------------------------|--------|-------------------|--------|-------------------|--------|--------------|--------|-------------|
| United Ethanol                                               |   | Milton, WI        |   | Corn              |   |         |   | 52          |
| United WI Grain  Producers, LLC*                             |   | Friesland, WI     |   | Corn              |   | 49           |   |        |
| US BioEnergy  Corp.                                          |   | Albert City, IA   |   | Corn              |   | 250          |   | 250         |
|                                                         |   | Woodbury, MI      |   | Corn              |   |         |   |        |
|                                                         |   | Hankinson, ND     |   | Corn              |   |         |   |        |
|                                                         |   | Ord, NE           |   | Corn              |   |         |   |        |
|                                                         |   | Central City , NE |   | Corn              |   |         |   |        |
|                                                         |   | Dyersville, IA    |   | Corn              |   |         |   |        |
| U.S. Energy  Partners, LLC (White Energy)                    |   | Russell, KS       |   | Milo/wheat starch |   | 48           |   |        |
| Utica Energy, LLC                                            |   | Oshkosh, WI       |   | Corn              |   | 48           |   |        |
| VeraSun Energy Corporation                                   |   | Aurora, SD        |   | Corn              |   | 230          |   | 330         |
|                                                         |   | Ft. Dodge, IA     |   | Corn              |   |         |   |        |
|                                                         |   | Charles City, IA  |   | Corn              |   |         |   |        |
|                                                         |   | Welcome, MN       |   | Corn              |   |         |   |        |
|                                                         |   | Hartely, IA       |   | Corn              |   |         |   |        |
| Voyager Ethanol,  LLC*                                       |   | Emmetsburg, IA    |   | Corn              |   | 52           |   |        |
| Western New York  Energy, LLC                                |   | Shelby, NY        |   | Corn              |   |         |   | 50          |
| Western Plains  Energy, LLC*                                 |   | Campus, KS        |   | Corn              |   | 45           |   |        |
| Western Wisconsin  Renewable Energy, LLC*                    |   | Boyceville, WI    |   | Corn              |   | 40           |   |        |
| White Energy                                                 |   | Hereford, TX      |   | Corn/Milo         |   |         |   | 100         |
| Wind Gap Farms                                               |   | Baconton, GA      |   | Brewery waste     |   | 0.4          |   |        |
| Renova Energy                                                |   | Torrington, WY    |   | Corn              |   | 5            |   |        |
| Xethanol  BioFuels, LLC                                      |   | Blairstown, IA    |   | Corn              |   | 5            |   | 35          |
| Yuma Ethanol                                                 |   | Yuma, CO          |   | Corn              |   |         |   | 40          |
| ****Total Current Capacity at  113 ethanol biorefineries**** |   |              |   |              |   | **5,583.4**  |   |        |
| ****Total Under Construction  (78)/Expansions (7)****        |   | ** **        |   |              |   |         |   | **6,243.5** |
| **Total Capacity**                                           |   | ** **        |   |              |   | **11,826.9** |   |        |

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*locally-owned

February12, 2007 Renewable Fuels Association

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Ethanol production is also expandinginternationally.  Brazil has long been the world’s largest producer andexporter of ethanol, though since 2005, ethanol production in the United Statesslightly exceeded Brazilian production. Ethanol is produced more cheaply inBrazil than in the United States because of the use of sugarcane, a lessexpensive raw material alternative to corn.  Because of various tariffs onthe importation of ethanol into the United States, the price of ethanolproduced in the United States is currently more competitive than ethanolimported from Brazil.  In the event that these tariffs are reduced oreliminated, which are scheduled to expire in December 2008, the price of ethanolproduced in the United States may become less competitive, which couldadversely impact the ability to sell ethanol.

The Caribbean Basin Initiative allows for ethanolproduced in participating Caribbean Basin countries to be imported into theUnited States duty free. Large ethanol producers, like Cargill, have expressedan interest in building ethanol plants in these countries, such as El Salvador.While the Caribbean Basin Initiative caps the amount of duty free ethanolimported into the United States at 7% of the total United States’ productionfrom the previous year, as total production in the United States grows, theamount of ethanol produced from the Caribbean area and sold in the UnitedStates will grow accordingly, which could impact the ability to sell ethanol.

Finally, alternative fuels, gasoline oxygenates andethanol production methods are continually under development. The current trendin ethanol production research is to develop an efficient method of producingethanol from cellulose-based biomass, such as agricultural waste, forestresidue, municipal solid waste, and energy crops. This trend is driven by thefact that cellulose-based biomass is generally cheaper than corn, and producingethanol from cellulose-based biomass would create opportunities to produceethanol in areas which are unable to grow corn. Additionally, the enzymes usedto produce cellulose-based ethanol have recently become lessexpensive.   Furthermore, the Department of Energy has recentlyannounced support for the development of cellulose-based ethanol, including a$160 million Department of Energy program for pilot plants producingcellulose-based ethanol.  Several large companies, including IogenCorporation, Abengoa, Royal Dutch Shell Group, Goldman Sachs Group, Dupont andArcher Daniels Midland, have all indicated that they are interested in researchand development in this area.  In addition, Xethanol Corporation, ofBlairstown, Iowa, and Voyager Ethanol of Emmetsburg, Iowa, have stated plans toconvert or expand their plants to a cellulose-based ethanol facility after2007.

**Federal and State Government Supports**

Various federal and state laws, regulations, andprograms have led to an increasing use of ethanol in fuel, including subsidies,tax credits, policies and other forms of financial incentives.  Some ofthese laws provide economic incentives to produce and blend ethanol and othersmandate the use of ethanol.

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***The Renewable Fuels Standard***

The most recent ethanol supports are contained in theEnergy Policy Act of 2005. This law became effective on August 8, 2005 and isexpected to impact favorably the ethanol industry by enhancing both theproduction and use of ethanol. The provision of the Energy Policy Act of 2005likely to have the greatest impact on the ethanol industry is the creation of aRenewable Fuels Standard, known as the RFS. The RFS is a national program thatimposes requirements with respect to the amount of renewable fuel produced andused. RFS applies to refineries, blenders, distributors and importers, allowingthese entities to use renewable fuel blends in those areas where it is mostcost effective. The RFS requires that 4.7 billion gallons be sold or dispensedin 2007, increasing to 7.5 billion gallons by 2012.

***The Clean Air Act and OxygenatedGasoline Program***

Ethanol sales have been favorably affected by theClean Air Act amendments of 1990, particularly the Oxygenated Gasoline Program,which became effective November 1, 1992. The Oxygenated Gasoline Programrequires the sale of oxygenated motor fuels during the winter months in certainmajor metropolitan areas to reduce carbon monoxide pollution. Ethanol use hasalso increased as the result of a second Clean Air Act program, theReformulated Gasoline Program. This program became effective January 1, 1995and requires the sale of reformulated gasoline in numerous areas to reducepollutants, specifically those that contribute to ground level ozone, betterknown as smog. Reformulated gasoline that meets the performance criteria set bythe Clean Air Act can be reformulated in a number of ways, including theaddition of oxygenates to the gasoline. The two major oxygenates added toreformulated gasoline pursuant to these programs are MTBE and ethanol. MTBE hasbeen linked to groundwater contamination and has been banned from use in manystates. Although the Energy Policy Act of 2005 did not impose a national ban ofMTBE, its failure to include liability protection for manufacturers of MTBE isexpected to result in refiners and blenders using ethanol rather than MTBE.Prior to the passage of the Energy Policy Act, the reformulated gasolineprogram included a requirement that reformulated gasoline contain 2% oxygenate.The Energy Policy Act repealed that requirement.

***The Volumetric Ethanol ExciseTax Credit***

The use of ethanol as an alternative fuel source hasbeen aided by federal tax policy. In October 2004, the president signed a lawthat contained the Volumetric Ethanol Excise Tax Credit, known as VEETC, andamended the federal excise tax structure effective as of January 1, 2005. Priorto VEETC, ethanol-blended fuel was taxed at a lower rate than regular gasoline(13.2 cents on a 10% blend). Under VEETC, the ethanol excise tax exemption hasbeen eliminated, thereby allowing the full federal excise tax of 18.4 cents pergallon of gasoline to be collected on all gasoline and allocated to the highwaytrust fund. In place of the exemption, the bill creates a new volumetricethanol excise tax credit of 51 cents per gallon of ethanol blended at 10%.Based on volume, the VEETC is expected to allow greater refinery flexibility inblending ethanol since it makes the tax credit available on all ethanol blendedwith all gasoline, diesel and ethyl tertiary 

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butylether, known as ETBE, including ethanol in E85 (an 85% ethanol fuel blend) andE20 (a 20% ethanol fuel blend) in Minnesota. The VEETC is scheduled to expireon December 31, 2010.

***Small Ethanol Producer TaxCredit***

The Energy Policy Act of 2005 expanded who qualifiesfor the small ethanol producer tax credit. Historically, small ethanolproducers were allowed a 10-cents-per-gallon production income tax credit on upto 15 million gallons of production annually. The size of the plant eligiblefor the tax credit was limited to 30 million gallons. Under the Energy PolicyAct the size limitation on the production capacity for small ethanol producersincreased from 30 million to 60 million gallons. The credit can be taken on thefirst 15 million gallons of production. The tax credit is capped at $1.5million per year per producer. Upon completion of the plant’s expansion, theplant’s  annual production will exceed 60million gallons per year which will make us ineligible for the credit.

***Clean-Fuel Vehicle RefuelingEquipment Tax Credit***

In addition, the Energy Policy Act creates a new taxcredit that permits taxpayers to claim a 30% credit (up to $30,000) for thecost of installing clean-fuel vehicle refueling equipment, such as an E85 fuelpump, to be used in a trade or business of the taxpayer or installed at theprincipal residence of the taxpayer. Under the provision, clean fuels are anyfuel at least 85% of the volume of which consists of ethanol, natural gas,compressed natural gas, liquefied natural gas, liquefied petroleum gas andhydrogen and any mixture of diesel fuel and biodiesel containing at least 20%biodiesel. The provision is effective for equipment placed in service untilJanuary 1, 2010. While it is unclear how this credit will affect the demand forethanol in the short term, it is expected to help raise consumer awareness ofalternative sources of fuel and could positively impact future demand forethanol.

***Imported Ethanol Tariffs andQuotas***

Currently, there is a $0.54 per gallon tariff onimported ethanol, which is scheduled to expire in 2008.  Ethanol importsfrom 24 countries in Central America and the Caribbean region are exempted fromthe tariff under the Caribbean Basin Initiative or CBI, which provides thatspecified nations may export an aggregate of 7.0% of United States ethanolproduction per year into the United States, with additional exemptions fromethanol produced from feedstock in the Caribbean region over the 7.0%limit.  Large ethanol producers, such as Cargill, have expressed interestin building dehydration plants in participating Caribbean basin countries, suchas El Salvador, which would convert ethanol into fuel-grade ethanol forshipment to the United States. Ethanol imported from Caribbean basin countriesmay be a less expensive alternative to domestically produced ethanol.

***State Legislation Banning orLimiting MTBE Use***

As of February 2007, 25 states, includingCalifornia and New York, have banned or significantly limited the use ofMTBE due to environmental and public health 

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concerns. Ethanol has served as a replacement for muchof the discontinued volumes of MTBE and is expected to continue to replacefuture volumes of MTBE that are removed from the fuel supply.

***South Dakota***

In South Dakota, the state provides an incentiveproduction payment to ethanol producers operating in South Dakota.  Theproduction incentive consists of a direct payment to South Dakota ethanolproducers of up to $0.20 per gallon, which is divided among producers of fuelethanol within South Dakota up to a maximum of $1 million per year per plant (amaximum of $83,333 per month in 2006) and a maximum of $10 million over thelife of a plant.  The program caps the payments that can be distributed toall plants based in South Dakota in a program year to no more than $7 millionin payments in 2007 (program year ending June 30, 2007), and every yearthereafter. The payments are distributed to each plant in proportion to thetotal number of gallons of ethanol produced and marketed annually by all theplants in South Dakota.  As more plants commence production, or existingplants increase production, each plant will receive a lower proportionate shareof the maximum payment under the program. Due to an increase in claims made forpayment from new and existing plants during the 2006 program year, the fundswere depleted in full midway through the 2006 program year.  Based on thenumber of new plants and currently expanding plants, we believe the funds underthe program will be again depleted before the end of the 2007 program year.

The ethanol industry and our business depend uponcontinuation of the federal and state ethanol supports discussed above. Thesegovernment incentives have supported a market for ethanol that might disappearwithout the incentives. Alternatively, the government incentives may becontinued at lower levels than those at which they currently exist. Theelimination or reduction of such federal ethanol supports would make it morecostly for us to sell ethanol.

 **Environmental Regulation and Costs**

We are subject to extensive environmental regulationat the federal and state levels.  The federal environmental regulationswith which the plant must comply were promulgated by the U.S. EnvironmentalProtection Agency (EPA) pursuant to the Clean Air Act.  The stateenvironmental regulations with which the plant must comply, in contrast, werepromulgated by the South Dakota Department of Environment and Natural Resources(DENR). The EPA and the DENR regulate the air quality at the plant,particularly the plant’s emissions into the air.  The DENR also regulateswater collection and discharge. In addition to its own enforcement authorityunder this law, the EPA has delegated permitting and enforcement authority tothe DENR.  The plant is required to have the following permits from theseand other agencies in order to conduct operations:

• *Title Five Operating Permit from the DENR*.In South Dakota, the Title Five Operating Permit serves as the air quality andoperation permit for the plant. The plant must conduct ongoing emissionstesting to verify compliance with the Title Five Operating permit.

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• *Bureau of Alcohol, Tobacco and Fuel Permit from theUnited States Department of Treasury.* The plant is required to havethis permit because of the alcohol content of ethanol. The permit is due forrenewal annually.

• *A Surface Water Discharge Permit from the DENR.*TheSurface Water Discharge Permit regulates the terms of any storm waterdischarges associated with industrial activity. The permit requires the plantto provide ongoing compliance reports to the DENR. This permit is due forrenewal in 2008.

While the plant is currently in compliance with allapplicable environmental laws, regulations and permits, the plant must continueto comply with the permits and regulatory requirements. To accomplish this, theplant maintains an on-going program to ensure compliance with suchrequirements. Maintaining compliance may require the plant to incurexpenditures for such things as new or upgraded equipment or processes, some ofwhich could be material and costly.

Finally, federal and state government’s regulation ofthe environment changes constantly. It is possible that more stringent federalor state environmental rules or regulations could be adopted, which couldincrease the plant’s future operating costs and expenses. It also is possiblethat federal or state environmental rules or regulations could be adopted thatcould have an adverse effect on the use of ethanol. For example, changes in theenvironmental regulations regarding ethanol’s use due to currently unknowneffects on the environment could have an adverse effect on the ethanolindustry. Furthermore, the plant’s operations are governed by the OccupationalSafety and Health Administration (“OSHA”). OSHA regulations may change suchthat the future costs of the operation of the plant may increase. Any of theseregulatory factors may result in higher costs or other materially adverseconditions effecting operations, cash flows and financial performance.

**Management and Employees**

Broin Management, LLC, a division of the BroinCompanies, LLC, manages the day-to-day operations of the plant under amanagement agreement, that is in effect until June 30, 2015.  Under theagreement, Broin Management receives a fixed annual fee and an incentive bonusbased on our annual net income.  The plant also pays certain expenses incurredwith respect to the operation of the plant while other expenses, including, butnot limited to, the provision of a full-time technical manager and generalmanager, are included as part of Broin Management’s fees.  Mr. BlaineGomer, the plant’s general manager, is a Broin Management employee.  Mr.Gomer oversees and is responsible for operations and production at the plant ona day-to-day basis.  The general manager is a full-time, on-site position,but Mr. Gomer is an employee of Broin Management.

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As of March 1, 2007, the plant employed 45employees, including a commodities manager, a commodities supervisor, anoperations manager, a maintenance manager, a microbiologist, a chief mechanicaloperator, a controller, plant operators, maintenance technicians, grainsassistants, accountants, and an administrative assistant.  This does notinclude Mr. Gomer and the technical manager, both of whom are employees ofBroin Management.

**Available Information**

Our website is at www.northernlightsethanol.com, thenclicking on “Become a Member.” Our Annual Report on Form 10-K, QuarterlyReports on Form 10-Q, Current Reports on Form 8-K, and amendments toreports filed pursuant to Sections 13(a) and 15(d) of the SecuritiesExchange Act of 1934, as amended, are filed with the SEC. Such reports andother information filed by us with the SEC are available on the SEC website.The public may read and copy any materials filed by us with the SEC at the SEC’sPublic Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549.The public may obtain information on the operation of the Public ReferenceRoom by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internetsite that contains reports, proxy, and information statements and otherinformation regarding issuers that file electronically with the SEC at www.sec.gov.The contents of these websites are not incorporated into this filing.

**Item 1A. Risk Factors.**

*** *Risks Related toOperations**

**                *Our financial performance is dependent on marketprices for ethanol and distillers grains and corn, and our financial conditionand results of operation are directly affected by changes in these marketprices*. **Our results of operations andfinancial condition is significantly affected by the cost and supply of cornand by the selling price for ethanol and distillers grains. Changes in theprice and supply of these commodities are subject to and determined by marketforces over which we have no or little control, including overall supply anddemand, government programs and policies, weather, availability and price ofcompeting products, and other factors.

***Our business ishighly sensitive to corn prices, and we generally cannot pass on increases incorn prices to our customers.***Corn is the principal raw material we use toproduce ethanol and distillers grains. Because ethanol competes with fuels thatare not corn-based, we generally are unable to pass along increased corn coststo our customers, and, accordingly, rising corn prices tend to produce lowerprofit margins. At certain levels, corn prices would make ethanol uneconomicalto use in fuel markets. The price of corn is influenced by weather conditions(especially droughts) and other factors affecting crop yields, farmer plantingdecisions and general economic, market and regulatory factors, includinggovernment policies and subsidies with respect to agriculture and internationaltrade, and global and local supply and demand. The price of corn has fluctuatedsignificantly in the past and may fluctuate significantly in the future. Forexample, over the ten-year period from 1996 through 2006, corn prices (based on

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Chicago Board of Trade,or CBOT, daily futures data) have ranged from a low of $1.75 per bushel in 2000to a high of $5.48 per bushel in 1996. On December 31, 2006, the CBOT price ofcorn was $3.90 per bushel.  In addition,increasing domestic ethanol capacity could boost demand for corn and result inincreased corn prices. We may also have difficulty from time to time inpurchasing corn on economical terms due to supply shortages. Any supplyshortage could require us to suspend operations until corn became available ateconomical terms. Suspension of operations could have a material adverse effecton our business, results of operations and financial condition.

***Fluctuations in theselling price and production cost of gasoline may reduce our profit margins*.**Ethanol is marketed both as a fuel additive toreduce vehicle emissions from gasoline and as an octane enhancer to improve theoctane rating of gasoline with which it is blended. As a result, ethanol pricesare influenced by the supply and demand for gasoline and our business, futureresults of operations and financial condition may be materially adverselyaffected if gasoline demand or price decreases.

***The price ofdistillers grains is affected by the price of other commodity products, such assoybeans, and decreases in the price of these commodities could decrease theprice of distillers grains***. Distillers grains compete with other protein-based animal feed products.The price of distillers grains may decrease when the price of competing feedproducts decrease. The prices of competing animal feed products are based inpart on the prices of the commodities from which they are derived. Downwardpressure on commodity prices, such as soybeans, will generally cause the priceof competing animal feed products to decline, resulting in downward pressure onthe price of distillers grains. As a result, we may experience lower revenueand income.

***Our business issubject to seasonal fluctuations.***Our operating results are influenced byseasonal fluctuations in the price of our primary production inputs, namelycorn, and the price of our primary product, ethanol. In recent years, the spotprice of corn tends to rise during the spring planting season in May and Juneand tends to decrease during the fall harvest in October and November. Theprice for natural gas, however, tends to move opposite of corn and tends to belower in the spring and summer and higher in the fall and winter. In addition,our ethanol prices are substantially correlated with the price of unleadedgasoline. As a result, because the price of unleaded gasoline tends to riseduring the summer, the price of ethanol generally rises in the summer.

***Hedgingtransactions involve risks that could harm our profitability.*** In an attempt to minimize the effects of the volatility of corn and natural gason operating profits, we engage in hedging activities in the corn and naturalgas futures markets.  The effectiveness of such hedging activities isdependent, among other things, upon the cost of corn and natural gas and ourability to sell sufficient products to utilize all of the corn and natural gassubject to the futures contracts.  There is no assurance that our hedgingactivities will reduce the risk caused by price fluctuation which may leave usvulnerable to high corn and natural gas prices.  In addition, we maychoose not to take hedging positions in the future, which may adversely affectour financial condition if corn and natural gas prices increase.

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Our hedging activities can themselves result inincreased costs because price movements in corn and natural gas are highlyvolatile and are influenced by many factors that are beyond our control. In 2004, for example, hedging activities relative to the changing price of cornresulted in a material increase to our cost of revenues. We may incur thesecosts again and they may be significant.

***Our business is notdiversified because it is limited to the fuel grade ethanol industry, which maylimit our ability to adapt to changing business and market conditions.***   Oursole business is the production and sale of fuel grade ethanol produced fromcorn and its co-product, distillers grains. The plant does not have thecapability of producing industrial or food and beverage grade ethanol, which isused in such products as cosmetics, perfume, paint thinner and vinegar. Ourplant is also not equipped to capture carbon dioxide, another co-product of theethanol production process. The lack of diversification of our business maylimit our ability to adapt to changing business and market conditions.

***We are heavilydependent upon the Broin Companies, LLC.***   Wehave several agreements in place with companies owned and controlled by theBroin Companies, including those related to the purchase or marketing ofethanol and distillers grains, management of the plant, construction of theplant’s expansion, research and technology, and information technology.  If any of the agreements were to terminate,we might not be able to secure suitable and timely replacements for thoseservices at a reasonable cost or at all, which would materially harm ourbusiness.

***We are dependentupon Ethanol Products, LLC to purchase and market all of the ethanol producedat the plant*. ** Ethanol Products is theexclusive purchaser of all of the ethanol produced at the plant which, in turn,markets and transports the ethanol to refineries located throughout the UnitedStates.  If Ethanol Products breaches the ethanol marketing agreement oris not in the financial position to purchase all of the ethanol produced, wemay not have any readily available means to sell the ethanol and our financialcondition will be adversely and materially affected.  If the ethanolmarketing agreement with Ethanol Products were to terminate, we would be forcedto seek other arrangements to sell the ethanol produced, but there are noassurances that these arrangements would achieve results comparable to thoseachieved by Ethanol Products.

***                Interruptionsin energy supplies could delay or halt production at the plant, which willreduce our profitability.***  Ethanol productionrequires a constant and consistent supply of energy, including electricity,steam and natural gas.  If there is any interruption in the plant’s supplyof energy for whatever reason, such as supply, delivery or mechanical problems,we may be required to halt production.  If production is halted for anyextended period of time, it will reduce our profitability.  The plant hasagreements with various companies to provide the plant’s needed energy, but wecannot assure you that these companies will continue to be able to supplyreliably the necessary energy that the plant needs.  If the plant were tosuffer interruptions in its energy supply, our business would be harmed.

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***We are dependentupon Big Stone Plant for steam, and the plant may incur increased operatingcosts if the steam supply is terminated or interrupted.***    Theproduction of steam is a necessary energy source in the ethanol productionprocess. Ethanol plants generally rely upon on-site boilers to produce andsupply steam in the production process, which are typically powered by naturalgas.  We, in contrast, rely on the adjacent Big Stone Plant to supply asubstantial portion of the required steam to the plant.  If Big StonePlant were to shut down for any considerable length of time or is unable tomeet the plant’s steam requirements, the plant must operate with steam energysupplied from two on-site boilers. As a result, we may face increased operatingcosts because we would need to purchase more costly natural gas to fuel andpower these boilers.

***To produce ethanol,we need a significant supply of water*.**  Water supply and water quality are importantrequirements to produce ethanol.  The plant’s water requirements aresupplied by Big Stone City and Big Stone Plant.  We expect that Big StoneCity and the Big Stone Plant will continue to provide all of the plant’s waterrequirement, including following expansion of the plant.  If Big StoneCity and Big Stone Plant are unable to meet our requirements, the plant will beforced to find other sources and this could require us to spend additionalcapital which could harm our business.  We cannot assure you that theplant would be able to find alternate sources of water at commerciallyreasonable prices, if at all.

***We have restrictiveloan covenants with our lender.***    Ourloan agreement with US Bank obligates us to maintain certain amounts of workingcapital, capital expenditure and cash distribution to member limitations, andfixed coverage ratios. The failure to comply with the various loan covenantsmay result in penalties, restrict our activities or result in a default whichmay have an adverse effect on our liquidity.

**RisksRelated to the Industry**

***As more ethanol plants are built,ethanol production will increase and, if demand does not sufficiently increase,the price of ethanol and distillers grains may decrease*.**According to the RFA, domestic ethanol production capacity has increased steadilyfrom 1.7 billion gallons per year in January of 1999 to 5.58 billiongallons per year in February 2007. In addition, there is a significant amountof capacity being added to the ethanol industry. As of February 2007approximately 6.2 billion gallons per year of production capacity, iscurrently under construction at new and existing facilities. This capacityis being added to address anticipated increases in demand. However, demand forethanol may not increase as quickly as expected or to a level that exceedssupply, or at all. If the ethanol industry has excess capacity, it could have amaterial adverse effect on our business, results of operations and financialcondition. Excess ethanol production capacity also may result from decreases inthe demand for ethanol or increased imported supply.  In addition, because ethanol productionproduces distillers grains as a co-product, increased ethanol production willlead to increased supplies of distillers grains. An increase in the supply ofdistillers grains, without corresponding increases in demand, could lead tolower prices or an inability to sell our distillers grain production. A decline

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in the price ofdistillers grain or the distillers grain market generally could have a materialadverse effect on our business, results of operations and financial condition.

***We operate in anintensely competitive industry and there is no assurance that we will be ableto compete effectively.***   The ethanolbusiness is highly competitive, and other companies presently in the market, orthat are about to enter the market, could adversely affect prices for theproducts we sell. Commodity groups in the Midwest have encouraged theconstruction of ethanol plants, and there are numerous other entitiesconsidering the construction of ethanol plants. Nationally, the ethanolindustry may become more competitive given the substantial construction andexpansion that is occurring in the industry. We compete with other ethanolproducers such as Archer Daniels Midland, Cargill, among others, all of whichare capable of producing significantly greater quantities of ethanol than theamount we produce.  In light of such competition, there is no assurancethat we will be able to compete effectively in the industry.

***The effect of the RenewableFuels Standard, or RFS, in the Energy Policy Act of 2005 on the ethanolindustry is uncertain*. **The use of fuel oxygenates, includingethanol, was mandated through regulation, and much of the forecasted growth indemand for ethanol was expected to result from additional mandated use ofoxygenates. Most of this growth was projected to occur in the next few years asthe remaining markets switch from MTBE to ethanol. The Energy Policy Act,however, eliminated the mandated use of oxygenates and instead establishedminimum nationwide levels of renewable fuels (ethanol, biodiesel or any otherliquid fuel produced from biomass or biogas) to be included in gasoline.Because biodiesel and other renewable fuels in addition to ethanol are countedtoward the minimum usage requirements of the RFS, the elimination of theoxygenate requirement for reformulated gasoline may result in a decline inethanol consumption, which in turn could have a material adverse effect on ourbusiness, results of operations and financial condition.

***Competition fromthe advancement of technology may lessen the demand for ethanol and negativelyimpact our profitability*.**** Alternative fuels, gasoline oxygenates and ethanol productionmethods are continually under development. A number of automotive, industrialand power generation manufacturers are developing more efficient engines,hybrid engines and alternative clean power systems using fuel cells or cleanburning gaseous fuels. Vehicle manufacturers are working to develop vehiclesthat are more fuel efficient and have reduced emissions using conventionalgasoline. Vehicle manufacturers have developed and continue to work to improvehybrid technology, which powers vehicles by engines that utilize both electricand conventional gasoline fuel sources. In the future, the emerging fuel cellindustry offers a technological option to address increasing worldwide energycosts, the long-term availability of petroleum reserves and environmentalconcerns. Fuel cells have emerged as a potential alternative to certainexisting power sources because of their higher efficiency, reduced noise andlower emissions. Fuel cell industry participants are currently targeting thetransportation, stationary power and portable power markets in order todecrease fuel costs, lessen dependence on crude oil and reduce harmfulemissions. If the fuel cell and hydrogen 

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industriescontinue to expand and gain broad acceptance, and hydrogen becomes readilyavailable to consumers for motor vehicle use, we may not be able to competeeffectively. This additional competition could reduce the demand for ethanol,which would negatively impact our financial condition.

***Corn-based ethanolmay compete with cellulose-based ethanol in the future, which could make itmore difficult for us to produce ethanol on a cost-effective basis****. *Most ethanol is currently producedfrom corn and other raw grains, such as milo or sorghum-especially in theMidwest. The current trend in ethanol production research is to develop anefficient method of producing ethanol from cellulose-based biomass, such asagricultural waste, forest residue, municipal solid waste, and energy crops.This trend is driven by the fact that cellulose-based biomass is generallycheaper than corn, and producing ethanol from cellulose-based biomass wouldcreate opportunities to produce ethanol in areas which are unable to grow corn.Although current technology is not sufficiently efficient to be competitive,new conversion technologies may be developed in the future. If an efficientmethod of producing ethanol from cellulose-based biomass is developed, we maynot be able to compete effectively. If we are unable to produce ethanol ascost-effectively as cellulose-based producers, our ability to generate revenuewill be negatively impacted.

***Consumer resistanceto the use of ethanol based on the belief that ethanol is expensive, adds toair pollution, harms engines and takes more energy to produce than itcontributes, may affect the demand for ethanol which could affect our abilityto market our product*.  **Certain individuals believethat use of ethanol will have a negative impact on retail prices.  Manyalso believe that ethanol adds to air pollution and harms car and truckengines.  Still other consumers believe that the process of producing ethanolactually uses more fossil energy, such as oil and natural gas, than the amountof ethanol that is produced.  These consumer beliefs could potentially bewide-spread. If consumers choose not to buy ethanol, it would affect the demandfor the ethanol that we produce which could lower demand for ethanol andnegatively affect our profitability.

**Ethanol Plant Expansion Risks**

***We may need toincrease cost estimates for construction of the plant’s expansion,**and such increase could reduce our revenuestream and make the expansion unprofitable.**** *Broin and Associates agreed toexpand the plant based on a fixed contract price, according to the plans andspecifications in a design-build agreement.  We have based our capitalneeds on a design for the plant expansion that will cost approximately$50,000,000.  There is no assurance that the final cost of the expansionwill not be higher, nor is there any assurance that there will not be designchanges or cost overruns associated with the expansion of the plant. In addition,shortages of steel could affect the final cost and final completion date of theproject.  Any significant increase in the estimated construction cost ofthe expansion may make the expansion too expensive to complete or unprofitableto operate because our revenue stream may not be able to adequately support theincreased cost and expense attributable to increased construction costs.

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***Construction delayscould increase our costs.***  We anticipateconstruction of the expansion will be completed in June 2007; however,construction projects often involve delays in obtaining permits, constructiondelays due to weather conditions, or other events that delay the constructionschedule. If it takes longer to construct the expansion than we anticipate, itmay substantially increase our costs, which could have a material adverseeffect on our results of operations and financial condition.

***Delays and defectsin construction relating to the plant’s expansion could impair the plant’sability to operate.*** Under the terms of thedesign-build agreement with Broin and Associates, Inc., Broin and Associateswarrants that the material and equipment furnished for the plant expansion willbe new, of good quality, and free from defects in material orworkmanship.  Although Broin and Associates will, for a period of oneyear after substantial completion of the plant’s expansion, correct all defectsin material or workmanship at no additional expense to us, any defects inmaterial or workmanship may interrupt or hinder the operation of theplant.  These defects may have a material adverse impact on our financialcondition.

**Government, Regulatory and Other Risks**

***Governmentregulation could increase costs and reduce profitability*.**   Theoperation of the plant is subject to ongoing compliance with applicable federaland state governmental regulations, such as those governing emission control,ethanol production, grain purchasing and other matters. If any of theseregulations were to change, it could cost us significantly more to comply withthem. Further, other regulations may arise in future years regarding theoperation of the plant, including the possibility of additional permits andlicenses. We might have difficulty obtaining any such additional permits orlicenses, and they could involve significant unanticipated costs. We aresubject to all of these regulations without regard to whether the operation ofthe plant is profitable.

***Tariffs effectively limitimported ethanol into the United States, and their reduction or elimination couldundermine the ethanol industry in the United States.***Importedethanol is generally subject to a $0.54 per gallon tariff that wasdesigned to offset the $0.51 per gallon ethanol incentive available underthe federal excise tax incentive program for refineries that blend ethanol intheir fuel. There is, however, a special exemption from this tariff for ethanolimported from 24 countries in Central America and the Caribbean Islands, whichis limited to a total of 7% of United States ethanol production per year.Imports from the exempted countries may increase as a result of new plants indevelopment. Since production costs for ethanol in these countries aresignificantly less than what they are in the United States, the duty-freeimport of ethanol through the countries exempted from the tariff may negativelyaffect the demand for domestic ethanol and the price at which we sell ourethanol. ** **Wedo not know the extent to which the volume of imports would increase or theeffect on United States prices for ethanol if the tariff is not renewedbeyond its current expiration date in December 2008. Any changes in the tariffor exemption from the tariff could have a material adverse effect on ourbusiness, results of operations and financial condition.

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***Federal and statelaws, regulations and tax incentives concerning ethanol could expire or change,which could harm our business*. **As described in moredetail above, ethanol sales have been favorably affected by a variety offederal laws and supports.  The Clean Air Act Amendments of 1990 helpedspur demand for ethanol by requiring the use of oxygenated motor fuels. TheEnergy Policy Act of 2005 mandates the use of ethanol in motor vehicles through2012.  The Volumetric Ethanol Excise Tax Credit offers to blenders avolumetric ethanol excise tax credit of $0.51 cents per gallon of any ethanolblend.  The modification or elimination of any of the federal and stateslaws and programs, among others, could have a material adverse impact on us.

***If Northern Growersis treated as a corporation for federal income tax purposes, its capital unitscould decline in value.***    NorthernGrowers elected to be treated as a partnership for federal income tax purposes.This means that it does not pay income tax at the company level and that itsmembers pay tax on their proportionate share of the net income. In the eventthere are changes in the law or IRS interpretations, or that the trading of itscapital units results in the classification of Northern Growers as a publiclytraded partnership, we may be treated as a corporation rather than apartnership for federal income tax purposes. In that case, we would pay tax onour income at corporate rates and no income, gains, losses, deductions orcredits would flow through to its members. Currently, the maximum effectivefederal corporate rate is 35%. In addition, distributions would generally betaxed to members upon receipt as corporate dividends. Because a tax would beimposed upon Northern Growers at the entity level, the cash available for distributionto members would be reduced by the amount of the tax paid. Reduceddistributions could reduce the value of a member’s capital units.

***There aresignificant restrictions on transferring the capital units.***    Tomaintain preferential partnership tax status, Northern Growers’ capital unitsmay not be traded on an established securities market or readily tradable on asecondary market. To help ensure that a market does not develop, NorthernGrowers’ Operating Agreement prohibits transfers other than through theprocedures specified in its Capital Units Transfer System. Under this system,all transactions must be approved by Northern Growers’ board of managers. Theboard generally approves transfers that fall within “safe harbors” contained inthe publicly traded partnership rules under the federal tax code. Permittedtransfers include transfers by gift and death, sales to qualified familymembers, and sales through a “qualified matching service.” Transfers throughNorthern Growers’ qualified matching service are limited annually to no morethan the 10% of total capital units outstanding.  If a member transferscapital units in violation of the publicly traded partnership rules or withoutthe prior written consent of the board, the transfer is considered null andvoid and the board has the option to redeem the capital units at a substantialdiscount. These restrictions on transfer could reduce the value of a member’scapital units.

**Item 1B.  UnresolvedStaff Comments.**

None.

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**Item 2.  Properties.**

The plant is located immediately adjacent to Big StonePlant near the city of Big Stone City in Grant County, South Dakota.  Theland on which the plant is located is leased from Big Stone-Grant IndustrialDevelopment and Transportation, LLC, which is owned by Otter Tail PowerCompany, Montana-Dakota Utilities, and NorthWestern Corporation.  The termof the lease is for 99 years.  The rent is $2,520.00 per year untilDecember 31, 2010, after which the rent is increased by 5.0% from the immediatelypreceding five-year period.  In addition, the plant site is served bymultiple state highways, is near Interstate Highway 29, and has rail facilitiesand connections to the Burlington-Northern-Santa Fe Railroad system totransport the ethanol and distillers grains produced at the plant to variousmarkets.  All of the plant’s tangible and intangible property, includingits leasehold interest, easement rights, improvements, equipment, personalproperty, and contracts, serve as the collateral for the debt financing with USBank National Association, of Sioux Falls, South Dakota, which is describedbelow under “Item 7—Management’s Discussion and Analysis of Financial Conditionand Results of Operations—Indebtedness.”

**Item 3.  Legal Proceedings.**

From time to time in the ordinary course of business,we may be named as a defendant in legal proceedings related to various issues,including without limitation, workers’ compensation claims, tort claims, orcontractual disputes. We are not currently involved in any material legalproceedings, directly or indirectly, and we are not aware of any potentialclaims.

**Item 4.  Submission of Matters to a Vote of SecurityHolders.**

We did not submit any matter to a vote of our securityholders through the solicitation of proxies or otherwise during the fourthquarter of 2006.

### **PART II**

**Item 5.  Market for Registrant’s Common Equity, RelatedStockholder Matters and Issuer Purchaser of Equity Securities.**

As of March 1, 2007, Northern Growers had 859members.

*Trading Activity and Restrictions*

Northern Growers’ capital units are not traded on anestablished public trading market such as a stock exchange or The NASDAQ StockMarket.  Capital units must be transferred in accordance with NorthernGrowers’ Operating Agreement and its Capital Units Transfer System.  TheCapital Units Transfer System provides for transfers to qualified familymembers, by gift, upon death, and through a “qualified matching 

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service,”subject to final board of managers’ approval.  Since March 8, 2004, ourqualified matching service has been operated through Alerus SecuritiesCorporation, a registered broker-dealer operating a registered AlternativeTrading System with the SEC.   The following table containshistorical information by quarter for the past two years regarding the tradingof capital units:

| Quarter (1)      | ** ** | **Low   Price(2)** | ** ** | **High   Price(2)** | ** ** | **Average   Price(2)** | ** ** | **# of Capital  Units Traded   (2)** | ** ** |
|-----------------------|------------|-------------------------|------------|--------------------------|------------|-----------------------------|------------|----------------------------------------------------------|------------|
| Jan — Apr 2005   |       | $                       | .25        |                     | $          | .37                         |       | $                                                        | .58        |   | 1,168,000 |   |
| May — Aug 2005   |       | $                       | .31        |                     | $          | .37                         |       | $                                                        | .66        |   | 1,184,000 |   |
| Aug — Dec 2005   |       | $                       | .37        |                     | $          | .62                         |       | $                                                        | 1.05       |   | 680,000 |   |
| Jan — Mar 2006   |       | $                       | 1.37       |                     | $          | 1.91                        |       | $                                                        | 1.64       |   | 320,000 |   |
| April — Jun 2006 |       | $                       | 1.80       |                     | $          | 2.62                        |       | $                                                        | 2.31       |   | 750,000 |   |
| July — Sept 2006 |       | $                       | 3.15       |                     | $          | 4.35                        |       | $                                                        | 3.40       |   | 731,000 |   |
| Oct — Dec 2006   |       | $                       | 2.85       |                     | $          | 4.30                        |       | $                                                        | 3.52       |   | 245,000 |   |

 

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(1) Before January 1, 2006, our qualified matchingservice was operated on a trimester basis, after which it was moved to aquarter based system. Transfer of ownership of all capital units occurs on thefirst day of the quarter immediately following the quarter(s) in which thetrade occurs between the buyer and seller or the next following quarter,depending upon the date of the trade during the quarter. Quarters begin onJanuary 1, April 1, July 1 and October 1.

(2)All unit prices and number of units traded are adjustedto reflect a four-for-one capital unit split made effective on September 1,2005 and a two-for-one split made effective on July 1, 2006.

 

There were no issuer purchases of equity securitiesduring the fourth quarter ended December 31, 2006.

As a limited liability company, Northern Growers isrequired to restrict the transfers of its capital units in order to preserveits preferential single-level tax status.  Its capital units may not betraded on any national securities exchange or in any over-the-countermarket.  Northern Growers’ Capital Unit Transfer System prohibits anytransfer that would result in the loss of its partnership tax status.

Pursuant to Northern Growers’ Operating Agreement, aminimum of 2,500 capital units is required to become and remain a member. Inaddition to the transfer restrictions described above, under certain limitedcircumstances, the board of managers retains the right to redeem the capitalunits at $0.20 per capital unit. The board’s right to redeem is available inthe event a member breaches the Operating Agreement, upon a member’s failure tofulfill the membership requirements, and with respect to other matters. Underthe qualified matching service, the number of capital units traded annuallycannot exceed 10% of Northern Growers’ total issued and outstanding capitalunits.

*Distributions*

Under the terms of Northern Growers’ Amended andRestated Operating Agreement dated January 1, 2006, the board of managers isrequired to make annual (or more frequent) distributions to its members and maynot retain more than $200,000 of net cash from operations, unless (i) a supermajority of the board of managers (75%) decides otherwise, (ii) it wouldviolate or cause a default under the terms of any debt financing or 

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othercredit facilities, or (iii) it is otherwise prohibited by law.  Forfurther details of the restrictions under our debt facilities, please see “Item7, Management’s Discussion and Analysis of Financial Conditions and Results ofOperations—Indebtedness.” Distributions are required to be issued to members ofrecord as of the last day of the quarter immediately prior to the quarter inwhich the distribution was approved by the board of managers.

In 2005, Northern Lights made cash distributions to NorthernGrowers of approximately $12.5 million and $3.7 million to the minority memberof Northern Lights.  Northern Growers, in turn, distributed to its membersapproximately $12.22 million, or $0.241 per capital unit.

In 2006, Northern Lights made cash distributions toNorthern Growers of approximately $22.95 million and $6.79 million to theminority member of Northern Lights.  Northern Growers, in turn,distributed to its members approximately $22.67 million, or $0.448 per capitalunit.

Thus far in 2007, Northern Lights made cashdistributions to Northern Growers of approximately $8.49 million and $2.51 tothe minority member of Northern Lights.  Northern Growers, in turn,distributed to its members approximately $6.78 million, or $0.134 per capitalunit.  Approximately $1.69 million of the$8.49 million, has been retained by Northern Growers in anticipation of apotential redemption of capital units from a member with the largest holding ofunits in Northern Growers, though it is uncertain whether any redemption willactually occur.

It is uncertain whether similar distributions will bemade in 2007. The ability to issue similar distributions is substantiallydependent upon our profitability, the discretion of our board of managerssubject to the provisions of the Operating Agreement, and the approval from ourlender.

**Item 6.  Selected Financial Data.**

The following table sets forth our selected financialdata for the periods indicated. The audited financial statements included inItem 8 of this report have been audited by our independent auditors, EideBailly LLP.
| ** **                              | ** ** | **2006**   | ** **  | **2005**   | ** ** | **2004**   | ** ** | **2003(2)** | ** ** | **2002(1)** | ** ** |
|-----------------------------------------|------------|------------|-------------|------------|------------|------------|------------|-------------|------------|-------------|------------|
| **Statement  of Operations Data:**      |       |       |        |       |       |       |       |        |       |        |       |
| Revenues                                |       | $          | 122,837,119 |       | 89,692,708 |       | 86,587,585 |        | 70,857,262 |        | 32,756,935 |   |
| Cost of Revenues                        |       | $          | 62,731,376  |       | 63,552,756 |       | 71,279,883 |        | 58,920,917 |        | 24,674,714 |   |
| General and  Administrative Expenses    |       | $          | 6,364,983   |       | 3,913,177  |       | 2,984,237  |        | 2,739,136  |        | 1,352,524  |   |
| Income from  Operations                 |       | $          | 53,740,760  |       | 22,226,775 |       | 12,323,465 |        | 9,197,209  |        | 6,072,565  |   |
| Interest Expense                        |       | $          | 1,271,243   |       | 1,420,827  |       | 1,500,438  |        | 1,847,108  |        | 963,714    |   |
| Minority  Interest in Subsidiary Income |       | $          | (12,132,284 | )          | (4,848,463 | )          | (2,528,026 | )           | (1,770,430 | )           | (1,229,452 | ) |
| Net Income                              |       | $          | 40,703,348  |       | 16,157,712 |       | 8,371,332  |        | 5,611,068  |        | 3,880,017  |   |
|                                    |       |       |        |       |       |       |       |        |       |        |       |
| Capital Units  Outstanding (3)          |       | 50,628,000 |        | 50,628,000 |       | 50,628,000 |       | 50,628,000  |       | 50,628,000  |       |

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| Cash  Distributions declared per Capital Unit |   | $ | 0.518 |   | 0.230 |   | 0.118 |   | 0.095 |   | 0.000 |   |
|-----------------------------------------------|--------|---|-------|--------|-------|--------|-------|--------|-------|--------|-------|--------|
| Net Income per Capital  Unit                  |   | $ | 0.804 |   | 0.319 |   | 0.165 |   | 0.111 |   | 0.077 |   |

 
| **Balance  Sheet Data:**             |   |   |        |   |       |   |       |   |       |   |       |
|--------------------------------------|--------|--------|-------------|--------|------------|--------|------------|--------|------------|--------|------------|
| Working Capital                      |   | $      | 15,795,102  |   | 9,011,848  |   | 560,046    |   | 194,176    |   | 5,718,766  |   |
| Net Property,  Plant & Equipment |   | $      | 66,413,382  |   | 39,097,204 |   | 40,885,964 |   | 41,735,733 |   | 43,016,408 |   |
| Total Assets                         |   | $      | 101,479,908 |   | 59,315,715 |   | 54,678,507 |   | 53,786,201 |   | 59,031,879 |   |
| Long-Term Obligations                |   | $      | 33,391,741  |   | 17,104,400 |   | 16,387,498 |   | 20,053,377 |   | 27,858,349 |   |
| Minority  Interest in Subsidiary     |   | $      | 10,790,823  |   | 7,054,934  |   | 5,715,325  |   | 5,014,499  |   | 4,899,960  |   |
| Members’ Equity                 |   | $      | 38,262,916  |   | 23,949,718 |   | 19,446,001 |   | 17,067,695 |   | 16,280,448 |   |
| Book Value per  Capital Unit         |   | 0.756  |        | 0.473  |       | 0.384  |       | 0.337  |       | 0.322  |       |

 

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(1) The plant commenced operations on July 26, 2002.

(2) Northern Growers reorganized from a cooperative toa limited liability company on April 1, 2003.

(3) Adjusted for a four-for-one capital unit splitmade effective September 1, 2005 and a two-for-one split effective July 1,2006.

 

**Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operation.**

*You should read the followingdiscussion along with our financial statements and the notes to our financialstatements included elsewhere in this report. The following discussion containsforward-looking statements that are subject to risks, uncertainties andassumptions. Our actual results, performance and achievements may differmaterially from those expressed in, or implied by, such forward-lookingstatements. See “Cautionary Statement Regarding Forward-Looking Information” atthe beginning of this report.*

**Overview and Executive Summary**

Northern Growers, LLC (“Northern Growers”) owns andmanages a 77.16% interest in its subsidiary, Northern Lights Ethanol, LLC (“NorthernLights”) (Northern Lights and Northern Growers are also collectively referredto as “we” “us” or “our”). Broin Investments I, LLC owns the remaining minorityinterest in Northern Lights. Northern Lights owns and operates an ethanol plant(the “plant”) near Big Stone City, South Dakota. The plant produces fuel-gradeethanol and distillers grains through the processing of corn. Corn is suppliedto the plant from purchases of corn on the local open market. The ethanolproduced at the plant is sold to Ethanol Products, which subsequently marketsand sells the ethanol to gasoline blenders and refineries located throughoutthe continental United States.  Distillers grains, a co-product of theproduction process, are sold through Dakota Gold Marketing, which markets andsells the product to livestock feeders primarily located in the United States.

Our operating and financial performance is largelydriven by the prices at which we sell ethanol and distillers grains and thecosts related to production. Federal and state government incentive programs,unlike in prior years, are no longer a material source of revenue and income.The price of ethanol is generally influenced by factors such as supply anddemand, prices of unleaded gasoline and the petroleum markets, weather, and 

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governmentpolicies and programs. The price of distillers grains is generally influencedby supply and demand, and the price of corn, soybean meal and otherprotein-based feed products.  Our twolargest costs of production are corn and natural gas, although the plant’s costfor natural gas is offset by the use of steam supplied from the adjacent BigStone Plant. The cost of natural gas and corn is generally impacted by factorssuch as supply and demand, weather, government policies and programs, and ourrisk management program used to protect against the price volatility of thesecommodities.

We generated record profits in 2006. Our net incomefor 2006 was $40.7 million compared to $16.1 million in 2005.  The primary factor driving profits was anincrease in ethanol revenues during a period of relatively constant cost ofrevenues. Ethanol revenues rose by 46% due to a 4% increase in production andsales volume and a 41% increase in ethanol prices. Production and,consequently, sales volume rose due to continued improvement in plantefficiencies and less plant shut-down time. Ethanol prices rose significantlyduring the first three quarters as a result of increased demand from refineriesand increases in the price of unleaded gasoline. Demand was spurred byrefineries accelerating their phase out of MTBE in the refinery process,switching to ethanol in its place. During the fourth quarter of 2006, however, ethanolprices pulled back significantly due to a reduction in the price of unleadedgasoline, thus halting any further revenue growth. Cost of revenues, on theother hand, were relatively constant, decreasing by about 1% between periods.Despite a sharp rise in corn prices during the fourth quarter, cost of revenuesdecreased slightly from 2005 to 2006 due to decreased energy costs and gainsfrom our corn price risk management program.

Our prospects in 2007 are not as positive as last yearas significant challenges will be faced. Our first challenge is dealing with the potential of excess supply.Nationally, 77 plants are under construction and seven existing plants areundergoing expansion, which is expected to create over three billion gallons ofnew ethanol production. Additional increases in supply are expected from theimport of ethanol from countries like Brazil. Unless new markets for ethanolopen up to absorb these gallons, we anticipate that there will be downwardpressure on ethanol prices.

New production of ethanol may also translate into anincrease in distillers grains production and supply. Like ethanol, unless newmarkets for distillers grains open up, such as in the hog and poultryindustries, or the price of distillers grains does not move correspondinglywith an increase in corn prices, there could be downward pressure on distillersgrains’ prices and therefore revenue. Consequently, we will depend even more onour marketer to locate new markets, which could include further emphasis ondeveloping markets internationally.

Another challenge is dealing with the potential ofrising corn costs, which would translate to a higher cost of revenues. Sincethe fourth quarter of 2006, corn supplies have significantly tightened due to apoor corn harvest worldwide and increase in demand from the ethanol industry.This resulted in the price of corn reaching close to $4.00 in January 2007, arecord high since 1996. While we currently have a risk management  program in place against rising corn pricesthrough May 2007, which should partially 

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mitigateagainst this risk, we will be subject to the risk of the market and decreasedmargins after this period.

There may be partial offsets, however, to the risingethanol supplies and corn costs. One potential offset may be the potentialstability of natural gas costs. Natural gas prices are expected to remain lowuntil the summer of 2007 due to adequate storage supplies and a relatively mildwinter thus far. Another potential offset is the improvements being made to ourplant. Last fall, we completed the incorporation of new technology into theproduction process called BPXTM. This technology is expected to decrease ourenergy costs. Likewise, we are currently on schedule to complete the expansionof the plant to a 75 million gallon annual capacity, which is expected toincrease our efficiencies through economies of scale.

Without significant offsets, however, our revenues andearnings are expected to decrease from 2006, which will mean a decrease indistributions to our members. How much of a decrease will depend on the effectsof the current corn and ethanol price trend. Because of a decrease in revenuesand earnings, we may be faced with taking sterner fiscal measures in 2007 tocover operating costs. One such measure may be to retain more earnings in lieuof making distributions to members.

#### **Resultsof Operations**

**Comparison of years ended December 31, 2006 andDecember 31, 2005.**
| ** **                           | ** ** | **Year Ended December 31,** |
|--------------------------------------|------------|--------------------------------------------|
| ** **                           | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
| ** **                           | ** ** | **$**                                      | ** ** | **%  of  Revenue** | ** ** | **$** | ** ** | **%  of  Revenue** | ** ** |
| Revenue:                             |       |                                       |   |   |   |   |   |   |   |
| Ethanol                              |       | 105,702,927                                |   | 86 | % | 72,633,304 |   | 81 | % |
| Distillers grains                    |       | 16,349,308                                 |   | 13 | % | 16,305,319 |   | 18 | % |
| Incentive                            |       | 784,884                                    |   | 1 | % | 754,085 |   | 1 | % |
| Total                                |       | 122,837,119                                |   | 100 | % | 89,692,708 |   | 100 | % |
|                                 |       |                                       |   |   |   |   |   |   |   |
| Cost of Revenues                     |       | 62,731,376                                 |   | 51 | % | 63,552,756 |   | 71 | % |
|                                 |       |                                       |   |   |   |   |   |   |   |
| General and  Administrative Expenses |       | 6,364,983                                  |   | 5 | % | 3,913,177 |   | 4 | % |
|                                 |       |                                       |   |   |   |   |   |   |   |
| Other Operating  Income (Expense)    |       | (905,128                                   | ) | (1 | %) | (1,220,600 | ) | (1 | %) |
|                                 |       |                                       |   |   |   |   |   |   |   |
| Minority  Interest in Subsidiary     |       | (12,132,284                                | ) | (10 | %) | (4,848,463 | ) | (5 | %) |
| Net Income                           |       | 40,703,348                                 |   | 33 | % | 16,157,712 |   | 18 | % |

 

*Revenues*- Revenuefrom the sale of ethanol increased 46% from the year ended December 31, 2005 tothe year ended December 31, 2006.  The increase was due to a 41% increasein the average price of ethanol per gallon and a 4% increase in sales volume.

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Revenue from the sale of distillers grains increasedmodestly from the year ended December 31, 2005 to the year ended December 31,2006. The increase was due primarily to a slight increase in sales volumefollowing an increase in production volume.

The incentive revenue from the United StatesDepartment of Agriculture’s Commodity Credit Corporation Bioenergy Programdecreased $40,000 to $9,000 for the year ended December 31, 2006 from $49,000for the year ended December 31, 2005.  Minimal incentive revenue wasearned under this program for the year ended December 31, 2006 because theprogram ended June 30, 2006. Incentive revenue from the state of South Dakotaincreased $70,000, or 10%, to $776,000 for the year ended December 31, 2006from $705,000 for the year ended December 31, 2005.

*Cost of Revenues-*Cost of revenues decreased $800,000, or 1%, to $62.7 million for the year endedDecember 31, 2006 from $63.5 million for the year ended December 31, 2005.  Cost of revenues decreased slightly betweenperiods as an increase in production volume was offset primarily by a decreasein energy costs. Corn costs between periods remained relatively constant as a13% rise in the market price of corn, most of which was due to rising pricesduring the fourth quarter of 2006 and increased competition for corn from a newlocal storage elevator, was offset by a $2.9 million net gain under our cornprice risk management program. Gains and losses that result from a change invalue of corn and natural gas hedging and forward contract instruments arerecognized in cost of revenues as the changes occur. Gains are recognized as adecrease to cost of revenues, while losses are recognized as an increase tocost of revenues. For the year ended December 31, 2006, cost of revenuesincludes losses of $2.7 million from the use of corn hedging instruments. Thisloss was caused by the significant price increase to corn in the fourth quarterof 2006 and the effect it had on the value of the hedging instruments atDecember 31, 2006. The hedging loss was offset by a $5.6 million gain on ourforward contracting for corn during the same period. In August 2006, ChicagoBoard of Trade (CBOT) prices rose due to a reduction in bushels of corn to beharvested nationwide. Because we had locked in lower prices for corn under ourforward contracts during this time, however, the value of forward contractsrose and resulted in a $5.6 million gain at December 31, 2006.

In addition, our energy costs decreased 6% from 2005to 2006. This decrease was due to an increased use of steam from Big StonePlant and lower natural gas costs.  Ourvolume usage of steam, the cost of which is less than natural gas, increased19% from 2005 to 2006 because Big Stone Plant had fewer general maintenanceshut-downs in 2006 compared to 2005. During the same period, natural gas costsdecreased 4% from 2005 due primarily to an 11% decrease in the cost per unit.This decrease was due to stable prices and high storage capacity in 2006,compared to 2005 when the hurricane season caused the reverse effect.

*General and Administrative Expenses*-General and administrative expenses increased $2.45 million, or 63%,**to $6.36 million for the year endedDecember 31, 2006 from $3.91 million for the year ended December 31,2005.  The increase was primarily 

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due toincreased management incentive fees and costs during the year, which are basedon an increase in our profitability.

*Interest Expense*-Interest expense decreased $150,000, or 11%, to $1.27 million for the yearended December 31, 2006 from $1.42 million for the year ended December 31,2005.  The decrease in interest expense was due to a $1.9 millionreduction in non-construction related debt outstanding from December 31, 2005to December 31, 2006 as we continued to reduce our debt through principalpayments.

*Net Income-* Netincome increased $24.5 million to $40.7 million for the year ended December 31,2006 from $16.2 million for the year ended December 31, 2005.  This changewas caused primarily by, as discussed above, an increase in ethanol revenue ata time of relatively constant cost of revenues.

**Comparison of years ended December 31, 2005 andDecember 31, 2004.**
| ** **                           | ** ** | **Year EndedDecember 31,** |
|--------------------------------------|------------|--------------------------------------|
| ** **                           | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| ** **                           | ** ** | **$ **                          | ** ** | **%  of  Revenue** | ** ** | **$ ** | ** ** | **%  of  Revenue** | ** ** |
| Revenue:                             |       |                                 |   |   |   |   |   |   |   |
| Ethanol                              |       | 72,633,304                           |   | 81 | % | 68,501,969 |   | 79 | % |
| Distillers grains                    |       | 16,305,319                           |   | 18 | % | 16,486,472 |   | 19 | % |
| Incentive                            |       | 754,085                              |   | 1 | % | 1,599,144 |   | 2 | % |
| Total                                |       | 89,692,708                           |   | 100 | % | 86,587,585 |   | 100 | % |
|                                 |       |                                 |   |   |   |   |   |   |   |
| Cost of Revenues                     |       | 63,552,756                           |   | 71 | % | 71,279,883 |   | 82 | % |
|                                 |       |                                 |   |   |   |   |   |   |   |
| General and  Administrative Expenses |       | 3,913,177                            |   | 4 | % | 2,984,237 |   | 3 | % |
|                                 |       |                                 |   |   |   |   |   |   |   |
| Other Operating  Income (Expense)    |       | (1,220,600                           | ) | (1 | )% | (1,424,107 | ) | (2 | )% |
|                                 |       |                                 |   |   |   |   |   |   |   |
| Minority  Interest in Subsidiary     |       | (4,848,463                           | ) | (5 | )% | (2,528,026 | ) | (3 | )% |
| Net Income                           |       | 16,157,712                           |   | 18 | % | 8,371,332 |   | 10 | % |

 

*Revenues*-Revenuefrom the sale of ethanol increased 6% from the year ended December 31, 2004 tothe year ended December 31, 2005.  The increase was due to a 5% increasein the average price of ethanol per gallon and a 1% increase in sales volume.Ethanol prices rose between periods due to rising unleaded gasoline prices,while sales volume rose following an increase in production volume.

Revenue from the sale of distillers grains decreasedonly slightly from the year ended December 31, 2004 to the year ended December31, 2005. The decrease was due primarily to a 3% decrease in the price ofdistillers grains, offset by a 2% increase in sales volume.  The price of distillers decreased primarilydue to a decrease in price of competing protein-based feed products, whilevolume increased following increased plant production.

 

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The incentive revenue from the United StatesDepartment of Agriculture’s Commodity Credit Corporation Bioenergy Programdecreased $880,000, or 95%, to $50,000 for the year ended December 31, 2005from $930,000 for the year ended December 31, 2004.  Minimal incentiverevenue was earned under this program for the year ended December 31, 2005because there was an insignificant increase in ethanol production at the plantfrom the twelve months ended December 31, 2004.  Payments under thisdiscontinued program were based in part on a plant’s increase in productionfrom the prior year’s corresponding periods.  Incentive revenue from thestate of South Dakota increased $38,000, or 6%, to $705,000 for the year endedDecember 31, 2005 from $667,000 for the year ended December 31, 2004.

*Cost of Revenues-*Costof revenues decreased $7.7 million, or 11%, to $63.6 million for the year endedDecember 31, 2005 from $71.3 million for the year ended December 31, 2004. Thedecrease in the cost of revenues was primarily due to a 32% decrease in thecost of corn, offset by a 10% increase in energy costs.  The decrease inthe cost of corn was caused primarily by a 26% decrease in the market price ofcorn per bushel from 2004 to 2005. The market price decreased because of a largecarryout and a plentiful corn harvest in 2005.

In addition to the market price decrease, the decreasein the cost of corn was caused in part by the use and effect of hedginginstruments relative to the market price of corn between periods. For the yearended December 31, 2004, cost of revenues includes losses of $3.5 million fromthe use of corn hedging instruments. These losses were caused by thesignificant price fluctuation of corn in 2004 and its effect on the value ofthe hedging instruments. In late 2003, we increased the use of corn hedginginstruments and positions to protect against the market price forecasts forcorn. The forecasts predicted higher prices for corn because of low worldcarryout prior to the growing season, decreased production, and drought. As theyear progressed, however, and it became apparent that corn production would bemuch higher than expected, the original market forecasts proved incorrect andthe market price of corn actually declined. When the market price declined, thevalue of the corn hedging instruments fell which led to the $3.5 million lossand a corresponding increase in cost of corn and cost of revenues.

In contrast, there was no material adverse effect oncost of revenues from the use of hedging instruments relative to the cornmarket for the year ended December 31, 2005.  Due to the record carryoutof corn into 2005 and the overall stable conditions in the commodities markets,we took fewer hedging positions to protect against potential price volatility.As a result, there was considerably less market risk exposure in 2005 andpotential for losses.  Accordingly, for the year ended December 31, 2005,a $245,000 gain resulted from the use of corn hedging instruments which, inturn, led to a corresponding decrease in the cost of revenues.

The decrease in cost of revenues between 2004 and 2005was offset by a 10% increase in energy costs between periods. This increase wasdue to a 31% increase in cost of natural gas per unit in 2005 and the effect ofa settlement credit received by the plant in November 2004.  Natural gascosts increased in 2005 because of a decrease in natural 

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gasproduction nationwide which was caused primarily by an overly active hurricaneseason and increased demand. With respect to the settlement credit, Big StonePlant issued to the plant in 2004 a $1.4 million credit after determining thata metering instrument had been miscalibrated and that the plant had beenovercharged for the use of steam.  Thiscredit resulted in the cost of steam for the plant being lower in 2004 than in2005.

*General and Administrative Expenses*-Generaland administrative expenses increased $930,000, or 31%,**to $3.91 million for the year endedDecember 31, 2005 from $2.98 million for the year ended December 31,2004.  The increase was primarily due to an increase in managementincentive fees and costs during the year, which are based on an increase in ourprofitability.

*Interest Expense*-Interestexpense decreased $80,000, or 5%, to $1.42 million for the year ended December31, 2005 from $1.50 million for the year ended December 31, 2004.  Thedecrease in interest expense was due to a $410,000 reduction in total debtoutstanding from December 31, 2004 to December 31, 2005, along with the receiptof more favorable interest rates after refinancing our debt in March 2005.

*Net Income-*Netincome increased $7.8 million to $16.2 million for the year ended December 31,2005 from $8.4 million for the year ended December 31, 2004.  This changewas caused primarily by, as discussed above, an increase in revenues and adecrease in the cost of corn, offset by an increase in energy costs.

**Liquidity and Capital Resources**

Our primary sources of liquidity are cash provided byoperations and borrowings under our $8.0 million revolving credit facilitywhich is discussed below under Indebtedness. Net working capital as of December31, 2006 was $15.8 million compared to $9.0 million as of December 31, 2005.

The following table shows the cash flows between theyear ended December 31, 2006 and the year ended December 31, 2005:

|                                                | ** ** | **Year Ended December 31** | ** **  |
|------------------------------------------------|------------|-------------------------------------------|-------------|
| ** **                                     | ** ** | **2006**                                  | ** **  | **2005** | ** ** |
| ** **                                     | ** ** | **$ **                               | ** **  | **$** | ** ** |
| Net cash from  operating activities            |       | $                                         | 39,638,229  |   | 26,166,011 |   |
| Net cash from  (used for) investing activities |       | $                                         | (29,101,256 | ) | (1,225,498 | ) |
| Net cash from (used  for) financing activities |       | $                                         | (12,668,790 | ) | (16,333,813 | ) |

 

*Cash Flow From Operating Activities—*Operatingactivities generated $39.6 million for the year ended December 31, 2006,compared to $26.1 million for the year ended December 31, 2005. The increase of$13.5 million in net cash flow provided from operating activities was primarilydue to the significant increase in net income between periods, offset by anincrease in cash used for accounts receivable and inventory.

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*Cash Flow From Investing Activities—*Netcash flow used for investing activities increased $27.9 million between periodsdue to capital improvement projects. The main project in 2006 was the start ofthe plant’s expansion and incorporation of BPXTM technology into the productionprocess.

We anticipate that at least $16.2 million in capitalexpenditures will be made in 2007, most of which will continue to relate to theplant’s expansion. These expenditures will be funded and financed by ourconstruction loan with US Bank.

We are contemplating redeeming in 2007 all or some ofthe capital units owned by a member with the largest holding of units. Theredemption and price at which it occur is uncertain, as we have only heldinformal discussions with this member to date and we are unsure how receptivethis member is to the redemption. For purposes of financing the potentialredemption, we retained approximately $1.69 million from the last distributionto members.

*Cash Flow From Financing Activities—*Netcash used for financing activities decreased $3.7 million between periods, dueprimarily to the $18.9 million advanced by US Bank under the construction notefor expansion and BPXTM.  This advance wasoffset by a $13.5 million increase in cash paid to members for distributionsduring 2006.

We believe that cash flows from operations and ourrevolving debt will be sufficient to meet our expected capital and liquidityrequirements (except for current plant expansion project) for the foreseeablefuture.

The following table shows the cash flows between the yearended December 31, 2005 and the year ended December 31, 2004:

|                                                | ** ** | **Year Ended December 31** | ** **  |
|------------------------------------------------|------------|-------------------------------------------|-------------|
| ** **                                     | ** ** | **2005**                                  | ** **  | **2004** | ** ** |
| ** **                                     | ** ** | **$ **                               | ** **  | **$ ** | ** ** |
| Net cash from  operating activities            |       | $                                         | 26,116,011  |   | 11,122,960 |   |
| Net cash from  (used for) investing activities |       | $                                         | (1,225,498  | ) | (2,050,295 | ) |
| Net cash from (used  for) financing activities |       | $                                         | (16,333,813 | ) | (8,437,658 | ) |

 

*Cash Flow From Operating Activities-*Operating activities generated $26.1 million for the year ended December 31,2005, compared to $11.1 million for the year ended December 31, 2004. Theincrease of $15.0 million in net cash flow provided from operating activitieswas primarily due to the significant increase in net income between periods,along with a decrease in cash used for accounts receivable and inventory.

*Cash Flow From Investing Activities-*Net cash flow used for investing activities decreased $820,000 between periodsdue in part to a refund of $200,570 from the State of South Dakota Departmentof Revenue for sales, use and contractors’ excise taxes paid on the originalconstruction of the plant, and a smaller amount spent on general capital 

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improvementprojects.  In 2005, capital improvement projects includedimprovements  for rail expansion, ethanolload-out systems, and buildings, compared to 2004 when improvements were madeprimarily to the plant’s dryer and electrical systems.

*Cash Flow From Financing Activities-*Net cash used for financing activities increased $7.9 million between periods,due primarily to an additional $11.2 million in distributions paid to members.The $11.2 million increase in total distributions paid was offset by a decreasein payments made on the long-term fixed and variable-rate notes. The decreasein payments on the long-term notes was due in part to the termination of theexcess cash flow payment on the fixed-rate note in connection with a debtrefinancing on March 30, 2005. As a result of the refinancing, no excesscash flow payments were made during the year ended December 31, 2005, comparedto $925,708 in payments during the year ended December 31, 2004. The decreasein payments on the long-term notes was also caused by the debt refinancing inMarch 2005, as the principal payments on the fixed rate and variable-rate,revolving notes, which would have been normally due on March 31, 2005,were temporarily suspended until the third quarter of 2005.  In additionto the offset from a decrease in payments made on the long-term fixed andvariable-rate notes, the increase in cash used for financing activities wasoffset by an additional $1.03 million borrowed from US Bank on March 30, 2005to pay for a rail expansion project.

**Indebtedness**

Our indebtedness comes in the form of five securednotes held by US Bank: 1) $33.0 million construction note; 2) a $15.8 millionfixed-rate note; 3) a $3.9 million variable-rate, non-revolving note; 4) a $1.2million fixed-rate note; and 5) an $8 million variable rate, revolving note. 

The $8 million note permits us to borrow, on arevolving basis, the difference between the unpaid principal balance and $8million. The revolving loan bears a variable-interest rate equal to the primerate announced by US Bank from time to time, adjusted each time the Prime Ratechanges. Quarterly payments of interest on any unpaid balance are due March 31,June 30, September 30, and December 31 of each year. The total unpaid principalbalance is due at maturity, or August 31, 2014. The loan is subject to aquarterly unused commitment fee of .0375% and prepayment is without penalty. Wehad $8.0 million available under this revolver as of December 31, 2006.

The construction note is for a sum of $33 million.Half of the loan is subject to a variable rate of one-month LIBOR plus 2.75%under an interest rate swap agreement, (see Item 7A below-”Quantitative andQualitative Disclosures About Market Risk”), to be adjusted and payablemonthly, and the other half of the loan is subject to US Bank’s prime rate withinterest payments due monthly.  OnOctober 16, 2006, US Bank funded to us $16.25 million in one lump sum under thenote subject to the interest rate swap 

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agreement.  When the construction loan converts to a termloan on or before August 31, 2007, the loan will be subject to two interestrate options at the time of conversion, a variable-interest rate or afixed-interest rate. The variable rate will be subject to the same rate as theprime rate on the construction loan, while the term loan will be subject to arate agreed to between the parties. Regardless of the rate, the loan will beamortized over a ten-year period commencing August 31, 2007 and is subject to amaturity no later than August 31, 2014. Payments of principal and interest aredue quarterly beginning November 30, 2007.

The $15.8 million fixed-rate note bears an annualinterest rate at 6.38%.  This noterequires quarterly payments of interest and amortized principal of $537,000 onthe basis of a ten-year term, with a balloon payment due at maturity on March31, 2012.  Principal payments of$1,212,624 were made on the note for the year ended December 31, 2006.  The principal balance outstanding on thisnote was $13.73 million as of December 31, 2006.

The $3.9 million variable-rate, non-revolving notebears an interest rate at US Bank’s prime rate (currently 8.25%), and issubject to a maturity of March 31, 2012. This note requires quarterly payments of interest and principal on thebasis of a ten year term, the first payment being made on June 30, 2005.  Principal payments of $390,000 were made onthe note for the year ended December 31, 2006. The principal balance outstanding was $3.22 million as of December 31,2006.

 The $1.2million fixed-rate note remains in place and bears an interest rate at 4.7%.The note matures on April 30, 2007. Principal payments of $317,095 weremade on the note for the year ended December 31, 2006, and the principalbalance outstanding was $165,900 as of December 31, 2006.

All of loans and notes outstanding are secured by ourtangible and intangible property, including a leasehold interest, easementrights, improvements, equipment, personal property, and contracts. In additionto standard covenants and conditions in the amended loan agreement, we aresubject to the following conditions and/or covenants: 1) a payment of $5million in cash from operations to fund expansion before any advance on theexpansion note is provided, which has been satisfied; 2) a capital expenditurelimitation not exceeding $1 million in any calendar year; 3) a cashdistribution limitation to members not exceeding 80% of net income annually; 4)a minimum working capital of $4 million at August 28, 2006 and, afterconversion of the construction loan to the term loan, a minimum of $7.5million; and 5) a fixed charge coverage ratio of 1.15:1 as of the last day ofany fiscal quarter for the four consecutive fiscal quarters ending on thatdate. We were in compliance with all conditions and covenants under our loanagreement with US Bank as of December 31, 2006 and as of the date of thisfiling.

The following table summarizes our consolidated contractualobligations as of December 31, 2006:

 

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| ** **                          | ** ** | ** ** | ** ** | ** **         | ** ** | **One to** | ** ** | **Four to** | ** ** | ** **          | ** ** |
|-------------------------------------|------------|------------|------------|--------------------|------------|-----------------|------------|------------------|------------|---------------------|------------|
| ** **                          | ** ** | ** ** | ** ** | **Less than** | ** ** | **Three**       | ** ** | **Five**         | ** ** | **After Five** | ** ** |
| **Contractual Obligations**    | ** ** | **Total**  | ** ** | **One Year**  | ** ** | **Years**       | ** ** | **Years**        | ** ** | **Years**           | ** ** |
| ** **                          | ** ** | ** ** | ** ** | ** **         | ** ** | ** **      | ** ** | ** **       | ** ** | ** **          | ** ** |
| Long-Term Debt  Obligations (1)     |       | $          | 68,566,918 |               | 6,134,325  |            | 16,850,257 |             | 15,652,357 |                | 29,929,979 |   |
| Operating Lease  Obligations        |       | $          | 382,195    |               | 2,520      |            | 5,040      |             | 5,166      |                | 369,469    |   |
| Purchase  Obligations(2)            |       | $          | 5,367,150  |               | 733,200    |            | 1,466,400  |             | 1,466,400  |                | 1,701,150  |   |
| Total  Contractual Cash Obligations |       | $          | 74,316,263 |               | 6,870,045  |            | 18,321,697 |             | 17,123,923 |                | 32,000,598 |   |

 

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(1)          Long-term debtobligations reflect payment obligations, including interest, arising under theamended Loan Agreement dated August 28, 2006.

(2)          Purchase obligationsinclude our minimum obligation for natural gas usage, and agreements formanagement services, marketing, and risk management.

 

##### **Off-BalanceSheet Arrangements**

We do not use or have any material off-balance sheetfinancial arrangements.

**Recent Accounting Pronouncements**

In September 2006,the FASB issued Statement No. 157, “Fair Value Measurements”. This Statementdefines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles and expands disclosure about fairvalue measurement. The implementation of this Statement is not expected to havea material impact on our financial statements.

In September 2006,the Securities and Exchange Commission adopted SAB No. 108, “Considering theEffects of Prior Year Misstatements when Quantifying Misstatements in CurrentYear Financial Statements.” This SAB provides guidance on the consideration ofthe effects of prior year misstatements in quantifying current yearmisstatements for the purpose of a materiality assessment. SAB 108 establishesan approach that requires quantification of financial statement errors based onthe effects of each of the company’s balance sheets and statements ofoperations and the related financial statement disclosures. The SAB permitsexisting public companies to record the cumulative effect of initially applyingthis approach in the first year ending after November 15, 2006 by recording thenecessary correcting adjustments to the carrying values of assets andliabilities as of the beginning of that year with the offsetting adjustmentrecorded to the opening balance of retained earnings. Additionally, the use ofthe cumulative effect transition method requires detailed disclosure of thenature and amount of each individual error being corrected through thecumulative adjustment and how and when it arose.  We expect that theadoption of SAB 108 will not have a material impact on our financialstatements.

In July 2006, theFASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in IncomeTaxes-an Interpretation of FASB Statement No. 109.” This Interpretationprescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to be

41

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taken in a tax return.This Interpretation also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure, andtransition. The Interpretation is effective for fiscal years beginning afterDecember 15, 2006 and we expect that the adoption of FASB Interpretation No. 48will not have a material impact on our financial statements.

**Critical Accounting Policies and Estimates**

Preparation of our financial statements requireestimates and judgments to be made that affect the amounts of assets,liabilities, revenues and expenses reported.  Such decisions include theselection of the appropriate accounting principles to be applied and theassumptions on which to base accounting estimates.  We continuallyevaluate these estimates based on historical experience and other assumptionswe believe to be reasonable under the circumstances.

The difficulty in applying these policies arises fromthe assumptions, estimates and judgments that have to be made currently aboutmatters that are inherently uncertain, such as future economic conditions,operating results and valuations as well as management intentions.  As thedifficulty increases, the level of precision decreases, meaning that actualresults can and probably will be different from those currently estimated.

Of the significant accounting policies described inthe notes to the financial statements, we believe that the following mayinvolve a higher degree of estimates, judgments, and complexity.

## *Commitments and Contingencies. *Contingencies, bytheir nature, relate to uncertainties that require management to exercisejudgment both in assessing the likelihood that a liability has been incurred,as well as in estimating the amount of the potential expense.  Inconformity with accounting principles generally accepted in the United States,we accrue an expense when it is probable that a liability has been incurred andthe amount can be reasonably estimated.

## *Inventory Valuation. *We account forcorn inventory at estimated net realizable market value.  Corn is anagricultural commodity that is freely traded, has quoted market prices, may besold without significant further processing, and has predictable andinsignificant costs of disposal.  We derive our estimates from localmarket prices determined by grain terminals in our area.  Changes in the marketvalue of corn inventory is recognized as a component of cost of revenues. Ethanol and distillers grains are stated at net realizable value. Work-in-process and chemical inventory are stated at an average cost method.

###### *Revenue Recognition. *Revenue from theproduction of ethanol and related products is recorded when title transfers tocustomers, net of allowances for estimated returns.  Interest income isrecognized when earned.

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Revenue from federal and state incentive programs isrecorded when we have produced or sold the ethanol and satisfied the reportingrequirements under each applicable program.  When it is uncertain that wewill receive full allocation and payment due under the federal incentiveprogram, we derive an estimate of the incentive revenue**for the relevant period based on variousfactors including the most recently used payment factor applied to theprogram.  The estimate is subject to change as management becomes aware ofincreases or decreases in the amount of funding available under the federalincentive program or other factors that affect funding or allocation of fundsunder such program.

## *Long-Lived Assets. *Depreciation andamortization of our property, plant, and equipment is provided on thestraight-line method by charges to operations at rates based upon the expecteduseful lives of individual or groups of assets.  Economic circumstances orother factors may cause management’s estimates of expected useful lives todiffer from actual.

Long-lived assets, including property, plant andequipment, and investments are evaluated for impairment on the basis ofundiscounted cash flows whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable.  An impairedasset is written down to our estimated fair market value based on the bestinformation available.  Considerable management judgment is necessary toestimate discounted future cash flows and may differ from actual cash flows.

*Accounting for DerivativeInstruments and Hedging Activities.  *We enter intoderivative instruments to hedge our exposure to price risk related toforecasted corn and natural gas purchases, forward corn purchase contracts andforecasted ethanol sales.  We do not typically enter into derivativeinstruments other than for hedging purposes.  All derivative contracts arerecognized on the December 31, 2006 and 2005 balance sheets at their fairmarket value.

On the date the derivative instrument is entered into,we designate the derivative as either (1) a hedge of the fair value of arecognized asset or liability or of an unrecognized firm commitment (fair valuehedge), (2) a hedge of a forecasted transaction or of the variability ofcash flows to be received or paid related to a recognized asset or liability(cash flow hedge) or (3) will not designate the derivative as ahedge.  Changes in the fair value of a derivative that is designated asand meets all the required criteria for a fair value hedge, along with the gainor loss on the hedged asset or liability that is attributable to the hedgedrisk, are recorded in current period earnings.  Changes in the fair valueof a derivative that is designated as and meets all the required criteria for acash flow hedge are recorded in accumulated other comprehensive income andreclassified into earnings as the underlying hedged item affectsearnings.  Changes in the fair value of a derivative that is notdesignated as a hedge are recorded in current period earnings.

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**Item 7A. Quantitative and Qualitative Disclosure About MarketRisk.**

We are exposed to the impact of market fluctuationsassociated with commodity prices and interest rates as discussed below. We haveno exposure to foreign currency risk as all of our business is conducted inU.S. Dollars. We use derivative financial instruments as part of anoverall strategy to manage market risk. Specifically, we use forward, futuresand option contracts to hedge changes to the commodity prices of corn andnatural gas, as well as interest rate swaps to hedge against changes ininterest rates. However, we do not enter into these derivative financialinstruments for trading or speculative purposes. The interest rate swapagreement is accounted for as a cash flow hedge pursuant to the requirements ofSFAS 133 as amended, Accounting for Derivative Instruments and HedgingActivities.

*Commodity Price Risk*

We produce ethanol and its co-product, distillersgrains, from corn, and, as such, we are sensitive to changes in the price ofcorn. The price of corn is subject to fluctuations due to unpredictable factorssuch as weather, total corn planted and harvested acreage, changes in nationaland global supply and demand, and government programs and policies. We also usenatural gas in the production process, and as such are sensitive to changes inthe price of natural gas. The price of natural gas is influenced by suchweather factors as heat or cold in the summer and winter, in addition to thethreat of hurricanes in the spring, summer and fall. Other natural gas pricefactors include the domestic onshore and offshore rig count, and the amount ofnatural gas in underground storage during both the injection (April 1st -November 7th) and withdrawal (November 14th - March 31st)seasons. The price of distillers grains is principally influenced by the priceof corn and soybean meal, competing protein feed products.

We attempt to reduce the market risk associated withfluctuations in the price of corn and natural gas by employing a variety ofrisk management strategies. Strategies include the use of derivative financialinstruments such as futures and options initiated on the Chicago Board of Tradeand/or the New York Mercantile Exchange, as well as the daily cash managementof our total corn and natural gas ownership relative to our monthly demand foreach commodity, which may incorporate the use of forward cash contracts orbasis contracts.

Corn is hedged with derivative instruments includingfutures and options contracts offered through the Chicago Board of Trade.Forward cash corn and basis contracts are also utilized to minimize futureprice risk. Likewise, natural gas is hedged with futures and options contractsoffered through the New York Mercantile Exchange. Basis contracts are alsoutilized to minimize future price risk.

Gains and losses on futures and options contracts usedas economic hedges of corn inventory, as well as on forward cash corn and basiscontracts, are recognized as a component of cost of revenues for financialreporting on a monthly basis using month-end settlement prices for corn futureson the Chicago Board of Trade. Corn inventories are marked to fair value usingmarket based prices so that gains or losses on the 

44

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derivativecontracts, as well as forward cash corn and basis contracts, are offset bygains or losses on inventories during the same accounting period.

Gains and losses on futures and options contracts usedas economic hedges of natural gas, as well as basis contracts, are recognizedas a component of cost of revenues for financial reporting on a monthly basisusing month-end settlement prices for natural gas futures on the New YorkMercantile Exchange. The natural gas inventories hedged with these derivativesor basis contracts are valued at the spot price of natural gas, plus or minusthe gain or loss on the futures or options positions relative to the month-endsettlement price on the New York Mercantile Exchange.

A sensitivity analysis has been prepared to estimateour exposure to commodity price risk. The table presents the fair value of openfutures and option positions for corn, natural gas and distillers grains as ofDecember 31, 2006 and December 31, 2005 and the potential loss in fair valueresulting from a hypothetical 10% adverse change in corn, natural gas pricesand distillers grains’. The fair value of the positions is a summation of thefair values calculated by valuing each net position at quoted market prices asof the applicable date. The results of this analysis, which may differfrom actual results, are as follows:

| Year Ended    | ** ** | **Fair Value** | ** ** | **Effect of Hypothetical   Adverse  Change — Market Risk** | ** ** |
|--------------------|------------|---------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| December 31,  2006 |       | $                   | 19,767,196 |                                                                                          | $          | 1,976,720 |   |
| December 31, 2005  |       | $                   | 9,487,543  |                                                                                          | $          | 948,754 |   |

 

*Interest Rate Risk*

Our interest rate risk exposure pertains primarily toour variable rate, long-term debt. Specifically, we had $5.93 million invariable rate, long-term debt as of December 31, 2006, or approximately 16% ofour total indebtedness. The interest rate on $3.22 million of the variablerate, long-term debt is US Bank’s prime rate, which was 8.25% as of December31, 2006.  The variable portion of theconstruction note debt was $2.71 million as of December 31, 2006, and was at8.1% based on One-Month LIBOR plus 2.75%. We manage our interest rate risk bymonitoring the effects of market changes on the interest rates and usingfixed-rate debt whenever possible and using the interest rate swap agreement onthe construction note.

 In order to achieve a fixed interest rate on aportion ($16.252 million) of our total construction loan ($33.0 million), weentered into an interest rate swap agreement with US Bank.  This agreementincludes the construction period from September 29, 2006 through August 31,2007 as well as the seven-year term financing period through August 31, 2014. When the construction loan converts to the permanent loan on August 31,2007, the swap agreement then covers $16.5 million of the total constructionloan amount.  This****agreementassists us in protecting against exposure to increases in interest rates andfixes the interest rate on 50% of the total construction loan at 7.98% untilAugust 31, 2014. The agreement is based on a variable rate of One-Month LIBORplus 2.75%, and is swapped for a fixed rate of 7.98% with monthly interestsettlements. While our exposure is now reduced, there can be no assurance thatthe interest rate swap will provide us with protection in all scenarios. For example, when One-Month LIBOR plus 

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2.75%exceeds 7.98%, we receive payments for the difference between the market rateand the swap rate. Conversely, when the One-Month LIBOR plus 2.75% falls below7.98%, we make payments for the difference. We are exposed to the impact ofmarket fluctuations associated with commodity prices and interest rates asdiscussed below. We have no exposure to foreign currency risk as all of ourbusiness is conducted in U.S. Dollars. We use derivative financial instrumentsas part of an overall strategy to manage market risk. Specifically, we useforward, futures and option contracts to hedge changes to the commodity pricesof corn and natural gas. However, we do not enter into these derivativefinancial instruments for trading or speculative purposes.

**Item 8.  Financial Statements and Supplementary Data.**

Reference is made to the “Index to FinancialStatements” of Northern Growers, LLC located at page F-1 of this report,and financial statements for the year ended December 31, 2006 referencedtherein, which are hereby incorporated by reference.

**Item 9.  Changes in and Disagreements With Accountantson Accounting and Financial Disclosure.**

None.

**Item 9A.  Controls and Procedures.**

*Evaluationof Disclosure Controls and Procedures.*  Our management, including the participationof our Chief Executive Officer/Chief Financial Officer, has concluded that,based on management’s evaluation as of the end of the period covered by thisAnnual Report on Form 10-K,  thedisclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)of the Securities Exchange Act of 1934) are effective to ensure that informationrequired to be disclosed by us in reports that we file or submit under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the time periods specified in Securities and Exchange Commission rulesand forms.  Additionally, based onmanagement’s evaluation, our disclosure controls and procedures were effectivein ensuring that information required to be disclosed in our Exchange Actreports is accumulated and communicated to our management, including our ChiefExecutive Officer/Chief Financial Officer, to allow timely decisions regardingrequired disclosures.

*Management’sreport on internal control over financial reporting. *Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting as defined in Rule 13a-15(f) of the Securities Exchange Actof 1934.  Our internal control overfinancial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted 

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accountingprinciples.  Our internal control overfinancial reporting includes those policies and procedures that (i) pertain tothe maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of assets; (ii) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with U.S. generally accepted accountingprinciples, and that our receipts and expenditures are being made only inaccordance with authorizations of our management and directors; and (iii)provide reasonable assurance regarding prevention or timely detection ofunauthorized acquisitions, use, or disposition of our assets that could have amaterial effect on the financial statements.

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

Management hasassessed our internal control over financial reporting in relation to criteriadescribed in *Internal Control- Integrated Framework*,issued by the Committee of Sponsoring Organizations of the TreadwayCommission.  Based on this assessmentusing those criteria, we concluded that, as of December 31, 2006, our internal controlover financial reporting was effective.

Our management’sassessment of the effectiveness of our internal control over financialreporting as of December 31, 2006 has been audited by Eide Bailly LLP, anindependent registered public accounting firm, as stated in their report whichappears on page F-1 of this Annual Report on Form 10-K.

*Changesin Internal Control over Financial Reporting.*  There was no change in our internal controlover financial reporting that occurred during the quarter ended December31,  2006 that has materially affected,or is reasonably likely to materially affect, our internal control overfinancial reporting.
|   | /s/ Robert Narem                       |   |
|--------|----------------------------------------|--------|
|   | Robert Narem,  Chief Executive Officer |   |
|   | and Chief  Financial Officer, Manager  |   |
|   | (Principal  Executive Officer)         |   |

 

**Item 9B.  Other Information.**

None.

 

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**PART III**

**Item 10.  Directors, Executive Officers and CorporateGovernance.**

**Compliance with Section 16(a) of the Exchange Act**

Information regarding untimely filings pursuant toSection 16 of the Securities Exchange Act of 1934, as amended, isincorporated in this Form 10-K by reference from Northern Growers’Information Statement for the Annual Meeting of Members to be held in 2007, acopy of which will be filed with the Commission not later than 120 days afterDecember 31, 2006.

**Code of Ethics**

Information regarding a code of ethics is incorporatedin this Form 10-K by reference to Northern Growers’ Information Statementfor the Annual Meeting of Members to be held in 2007, a copy of which will befiled with the Commission not later than 120 days after December 31, 2006.

**Directors**

Information regarding Northern Growers’ board ofmanagers is incorporated in this Form 10-K by reference from NorthernGrowers’ Information Statement for the Annual Meeting of Members to be held in2007, a copy of which will be filed with the Commission not later than 120 daysafter December 31, 2006.

**Executive officers**

Information required by this item regarding thebusiness experience of an executive is incorporated in this Form 10-K byreference from Northern Growers’ Information Statement for the Annual Meetingof Members to be held in 2007, a copy of which will be filed with theCommission not later than 120 days after December 31, 2006.

**Item 11.  Executive Compensation.**

The information required by this item is incorporatedby reference in this Form 10-K from Northern Growers’ InformationStatement for the Annual Meeting of Members to be held in 2007, a copy of whichwill be filed with the Commission not later than 120 days afterDecember 31, 2006.

**Item 12.  Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters.**

The information required by this item is incorporatedby reference in this Form 10-K from Northern Growers’ InformationStatement for the Annual Meeting of Members to be held in 2007, a copy of whichwill be filed with the Commission not later than 120 days afterDecember 31, 2006.

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**Item 13.  Certain Relationships and RelatedTransactions, and Directors Independence.**

The information required by this item is incorporatedby reference in this Form 10-K from Northern Growers’ InformationStatement for the Annual Meeting of Members to be held in 2007, a copy of whichwill be filed with the Commission not later than 120 days afterDecember 31, 2006.

**Item 14.  Principal Accounting Fees and Services.**

 The information required by this item isincorporated by reference in this Form 10-K from Northern Growers’Information Statement for the Annual Meeting of Members to be held in 2007, acopy of which will be filed with the Commission not later than 120 days afterDecember 31, 2006.

**PART IV**

**Item 15.  Exhibits, Financial Statement Schedules.**

(a) The following exhibits and financial statementsare filed as part of, or are incorporated by reference into, this report:

(1) FinancialStatements—Reference is made to the “Index to Financial Statements” ofNorthern Growers, LLC located at page F-1 of this report for a list of thefinancial statements and schedules for the year ended December 31, 2006included herein.

(2) Allsupplemental schedules are omitted because of the absence of conditions underwhich they are required or because the information is shown in the ConsolidatedFinancial Statements or notes thereto.

(3) Theexhibits we have filed herewith or incorporated by reference herein are setforth on the attached Exhibit Index.  The following exhibitsconstitute a management contract:  10.18 and 10.20.

(b) See Item 15(a)(3)

SIGNATURES

Pursuant to the requirement of Section 13 or15(d) of the Securities Exchange Act, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 
|        |                |   | NORTHERN GROWERS, LLC                                                                                       |
|--------|---------------------|--------|-------------------------------------------------------------------------------------------------------------|
|   |                |   |                                                                                                        |
| Date:  | March 16, 2007 |   | /s/ Robert Narem                                                                                            |
|   |                |   | Robert Narem, Chief Executive  Officer/Chief Financial Officer  (Principal Executive and Financial Officer) |

 

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Pursuant to the requirements of the SecuritiesExchange Act, this report has been signed below by the following persons onbehalf of the registrant and in the capacities and on the dates indicated.

 
|        |           |   | NORTHERN GROWERS, LLC                                                        |
|--------|----------------|--------|------------------------------------------------------------------------------|
|   |           |   |                                                                         |
| Date:  | March 16, 2007 |   | /s/ Robert Narem                                                             |
|   |           |   | Robert Narem, Chief Executive Officer   and Chief Financial Officer, Manager |
|   |           |   |                                                                         |
|   |           |   |                                                                         |
| Date:  | March 16, 2007 |   | /s/ Ronald Anderson                                                          |
|   |           |   | Ronald Anderson, Manager                                                     |
|   |           |   |                                                                         |
|   |           |   |                                                                         |
| Date:  | March 16, 2007 |   | /s/ Wendall Falk                                                             |
|   |           |   | Wendell Falk, Manager                                                        |
|   |           |   |                                                                         |
| Date:  | March 16, 2007 |   | /s/ Dennis Flemming                                                          |
|   |           |   | Dennis Flemming, Manager                                                     |
|   |           |   |                                                                         |
| Date:  | March 16, 2007 |   | /s/ Lars Herseth                                                             |
|   |           |   | Lars Herseth, Manager                                                        |
|   |           |   |                                                                         |
| Date:  | March 16, 2007 |   | /s/ Mark Lounsbery                                                           |
|   |           |   | Mark Lounsbery, Manager                                                      |
|   |           |   |                                                                         |
| Date:  | March 16, 2007 |   | /s/ Robert Metz                                                              |
|   |           |   | Robert Metz, Manager                                                         |
|   |           |   |                                                                         |
| Date:  | March 16, 2007 |   | /s/ Jeff Olson                                                               |
|   |           |   | Jeff Olson, Manager                                                          |
|   |           |   |                                                                         |
| Date:  | March 16, 2007 |   | /s/ Ronald Olson                                                             |
|   |           |   | Ronald Olson, Manager                                                        |
|   |           |   |                                                                         |
| Date:  | March 16, 2007 |   | /s/ Heath Peterson                                                           |
|   |           |   | Heath Peterson, Manager                                                      |
|   |           |   |                                                                         |
| Date:  | March 16, 2007 |   | /s/ Delton Strasser                                                          |
|   |           |   | Delton Strasser, Manager                                                     |
|   |           |   |                                                                         |
| Date:  | March 16, 2007 |   | /s/ Steve Street                                                             |
|   |           |   | Steve Street, Manager                                                        |
|   |           |   |                                                                         |
| Date:  | March 16, 2007 |   | /s/ Bill Whipple                                                             |
|   |           |   | Bill Whipple, Manager                                                        |
|   |           |   |                                                                         |
| Date:  | March 16, 2007 |   | /s/ Robert Wittnebel                                                         |
|   |           |   | Robert Wittnebel, Manager                                                    |

 

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**EXHIBIT INDEX**
| Exhibit  No. | ** ** | **Description**                                                                                               | ** ** | **Filed  Herewith** | ** ** | **Incorporated by  Reference**                                                                  |
|--------------|------------|---------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|-------------------------------------------------------------------------------------------------|
| 2.1          |       | Plan of Organization                                                                                          |       |                |       | Appendix A to Registrant’s Prospectus filed with the  Commission on March 17, 2003.        |
|         |       |                                                                                                          |       |                |       |                                                                                            |
| 3.1          |       | Articles of Organization                                                                                      |       |                |       | Appendix B to Registrant’s Prospectus filed with the  Commission on March 17, 2003.        |
|         |       |                                                                                                          |       |                |       |                                                                                            |
| 3.2          |       | Fourth Amended and Restated Operating Agreement  dated July 1, 2006.                                          |       |                |       | Exhibit 3.2 to the Registrant’s Form 10-Q filed with  the Commission on August 14, 2006.   |
|         |       |                                                                                                          |       |                |       |                                                                                            |
| 4.1          |       | Form of Class A Certificate                                                                                   |       |                |       | Exhibit 4.1 to the Registrant’s Form S-4 filed with  the Commission on July 26, 2002.      |
|         |       |                                                                                                          |       |                |       |                                                                                            |
| 10.1         |       | Ethanol Marketing and Services Agreement with  Ethanol Products, LLC, dated March 5, 2002.                    |       |                |       | Exhibit 10.5 to the Registrant’s Form S-4/A filed  with the Commission on January 8, 2003. |
|         |       |                                                                                                          |       |                |       |                                                                                            |
| 10.2         |       | DDGS Marketing Agreement with Dakota Commodities  (a/k/a Dakota Gold Marketing), dated April 10, 2002.        |       |                |       | Exhibit 10.6 to the Registrant’s Form S-4 filed with  the Commission on July 26, 2002.     |
|         |       |                                                                                                          |       |                |       |                                                                                            |
| 10.3         |       | Loan Agreement with US Bank, dated July 11, 2001.                                                             |       |                |       | Exhibit 10.7 to the Registrant’s Form S-4 filed with  the Commission on July 26, 2002.     |
|         |       |                                                                                                          |       |                |       |                                                                                            |
| 10.4         |       | Lease Agreement with Big Stone — Grant Industrial  Development and Transportation, dated April 18, 2001. |       |                |       | Exhibit 10.9 to the Registrant’s Form S-4 filed with  the Commission on July 26, 2002.     |
|         |       |                                                                                                          |       |                |       |                                                                                            |
| 10.5         |       | Steam Sale Agreement with Otter Tail Power Company,  dated April 18, 2001.                                    |       |                |       | Exhibit 10.10 to the Registrant’s Form S-4 filed  with the Commission on July 26, 2002.    |
|         |       |                                                                                                          |       |                |       |                                                                                            |
| 10.6         |       | Water and Fuel Oil Agreement with Otter Tail Power  Company, dated August 14, 2001.                           |       |                |       | Exhibit 10.11 to the Registrant’s Form S-4 filed  with the Commission on July 26, 2002.    |
|         |       |                                                                                                          |       |                |       |                                                                                            |
| 10.7         |       | Electric Service Agreement with Otter Tail Power  Company, dated September 26, 2001.                          |       |                |       | Exhibit 10.12 to the Registrant’s Form S-4 filed  with the Commission on July 26, 2002.    |
|         |       |                                                                                                          |       |                |       |                                                                                            |
| 10.8         |       | Water and Sanitary Sewer Agreement with the City of  Big Stone City, dated December 21, 2001.                 |       |                |       | Exhibit 10.13 to the Registrant’s Form S-4 filed  with the Commission on July 26, 2002.    |

 

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| 10.9   |   | Access and Rail Agreement with Otter Tail  Corporation, dated April 18, 2001.                                |   |   |   | Exhibit 10.14 to the Registrant’s Form S-4 filed  with the Commission on July 26, 2002.      |
|--------|--------|--------------------------------------------------------------------------------------------------------------|--------|--------|--------|---------------------------------------------------------------------------------------------------|
|   |   |                                                                                                         |   |   |   |                                                                                              |
| 10.10  |   | Industry Track Agreement with Burlington Northern  and Santa Fe Railway Company, dated January 8, 2002.      |   |   |   | Exhibit 10.15 to the Registrant’s Form S-4 filed  with the Commission on July 26, 2002.      |
|   |   |                                                                                                         |   |   |   |                                                                                              |
| 10.11  |   | Service Request Form and Extended Service Agreement  with NorthWestern Public Service, dated March 19, 2002. |   |   |   | Exhibit 10.17 to the Registrant’s Form S-4 filed  with the Commission on July 26, 2002.      |
|   |   |                                                                                                         |   |   |   |                                                                                              |
| 10.12  |   | Mortgage in favor of US Bank, dated December 31,  2002.                                                      |   |   |   | Exhibit 10.23 to the Registrant’s Form S-4/A filed  with the Commission on January 8, 2003.  |
|   |   |                                                                                                         |   |   |   |                                                                                              |
| 10.13  |   | $1.2 million Promissory Note with US Bank, dated May  1, 2003.                                               |   |   |   | Exhibit 10.18 to the Registrant’s Form 10-QSB filed  with the Commission on August 14, 2003. |
|   |   |                                                                                                         |   |   |   |                                                                                              |
| 10.14  |   | Amendment to US Bank Loan Agreement, dated June 22,  2004                                                    |   |   |   | Exhibit 10.1 to the Registrant’s Form 10-Q filed  with the Commission on August 16, 2004.    |
|   |   |                                                                                                         |   |   |   |                                                                                              |
| 10.15  |   | Second Amendment to US Bank Loan Agreement, dated  March 30, 2005.                                           |   |   |   | Exhibit 10.26 to the Registrant’s Form 10-K filed  with the Commission on March 31, 2005.    |
|   |   |                                                                                                         |   |   |   |                                                                                              |
| 10.16  |   | $15.8 Million Promissory Note with US Bank, dated  March 30, 2005.                                           |   |   |   | Exhibit 10.27 to the Registrant’s Form 10-K filed  with the Commission on March 31, 2005.    |
|   |   |                                                                                                         |   |   |   |                                                                                              |
| 10.17  |   | $3.9 Million Promissory Note with US Bank, dated  March 30, 2005.                                            |   |   |   | Exhibit 10.28 to the Registrant’s Form 10-K filed  with the Commission on March 31, 2005.    |
|   |   |                                                                                                         |   |   |   |                                                                                              |
| 10.18  |   | Management Agreement with Broin Management, LLC,  dated April 20, 2005.                                      |   |   |   | Exhibit 10.2 to the Registrant’s Form 10-Q filed  with the Commission on May 16, 2005.       |
|   |   |                                                                                                         |   |   |   |                                                                                              |
| 10.19  |   | Technology and Patent Rights License Agreement with  Broin and Associates, LLC, dated October 25, 2005. *    |   |   |   | Exhibit 10.1 to the Registrant’s Form 10-Q filed  with the Commission on November 14, 2005.  |
|   |   |                                                                                                         |   |   |   |                                                                                              |
| 10.20  |   | Amendment to the Management Agreement with Broin  Management, dated October 25, 2005.                        |   |   |   | Exhibit 10.2 to the Registrant’s Form 10-Q filed  with the Commission on November 14, 2005.  |
|   |   |                                                                                                         |   |   |   |                                                                                              |
| 10.21  |   | Design Build Agreement with Broin and Associates,  Inc., dated October 25, 2005.                             |   |   |   | Exhibit 10.3 to the Registrant’s Form 10-Q filed  with the Commission on November 14, 2005.  |
|   |   |                                                                                                         |   |   |   |                                                                                              |
| 10.22  |   | Amended and Restated Loan Agreement dated August 28,  2006                                                   |   |   |   | Exhibit 10.1 to the Registrant’s Form 10-Q filed  with the Commission on November 14, 2006.  |

 

52

----

 
| 10.23  |   | Expansion Construction Note Agreement dated August  28, 2006                  |   |   |   | Exhibit 10.2 to the Registrant’s Form 10-Q filed  with the Commission on November 14, 2006. |
|--------|--------|-------------------------------------------------------------------------------|--------|--------|--------|--------------------------------------------------------------------------------------------------|
|   |   |                                                                          |   |   |   |                                                                                             |
| 10.24  |   | $8.0 Million Variable Rate, Revolving Note dated  August 28, 2006             |   |   |   | Exhibit 10.3 to the Registrant’s Form 10-Q filed  with the Commission on November 14, 2006. |
|   |   |                                                                          |   |   |   |                                                                                             |
| 10.25  |   | Construction Mortgage and Addendum dated August 28,  2006                     |   |   |   | Exhibit 10.4 to the Registrant’s Form 10-Q filed  with the Commission on November 14, 2006. |
|   |   |                                                                          |   |   |   |                                                                                             |
| 10.26  |   | Security Agreement dated August 28, 2006                                      |   |   |   | Exhibit 10.5 to the Registrant’s Form 10-Q filed  with the Commission on November 14, 2006. |
|   |   |                                                                          |   |   |   |                                                                                             |
| 10.27  |   | Corn and Natural Gas Price Risk Management  Agreement, dated November 3, 2006 |   |   |   | Exhibit 10.6 to the Registrant’s Form 10-Q filed  with the Commission on November 14, 2006. |
|   |   |                                                                          |   |   |   |                                                                                             |
| 21.1   |   | Subsidiaries of the Registrant.                                               |   | X      |   |                                                                                             |
|   |   |                                                                          |   |   |   |                                                                                             |
| 31     |   | Rule 13a-14(a)/15d-14(a) Certifications                                       |   | X      |   |                                                                                             |
|   |   |                                                                          |   |   |   |                                                                                             |
| 32     |   | Section 1350 Certification                                                    |   | X      |   |                                                                                             |

----

*Theredacted portions of this exhibit were filed separately with the SEC subject toa request for confidential treatment dated November 14, 2005

53

----

**NORTHERN GROWERS, LLC**

Table of Contents

 
| **REPORT OF INDEPENDENT  REGISTERED PUBLIC ACCOUNTING FIRM**             | **F-1**    |
|--------------------------------------------------------------------------|------------|
| ** **                                                               | ** ** |
| **CONSOLIDATED FINANCIAL  STATEMENTS**                                   | ** ** |
| Balance  Sheets                                                          | F-2        |
| Statements of Operations                                                 | F-4        |
| Statements  of Changes in Members’ Equity and  Comprehensive Income | F-5        |
| Statements of Cash Flows                                                 | F-6        |
| Notes to Consolidated Financial Statements                               | F-8        |

 

----

 

## **REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

The AuditCommittee and Members**Northern Growers, LLC**

Big Stone City, South Dakota

We have audited the accompanying consolidatedbalance sheets of **Northern Growers, LLC**as of December 31, 2006 and 2005,and the related consolidated statements of operations, members’ equity andcomprehensive loss, and cash flows for each of the years in the three-yearperiod ended December 31, 2006.We also have audited management’s assessment, included in the accompanying Form10-K, that **Northern Growers, LLC** maintainedeffective internal control over financial reporting as of December 31, 2006, based on criteriaestablished in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO). **Northern Growers, LLC’s** management isresponsible for these financial statements, for maintaining effective internalcontrol over financial reporting, and for its assessment of the effectivenessof internal control over financial reporting. Our responsibility is to expressan opinion on these financial statements, an opinion on management’sassessment, and an opinion on the effectiveness of the company’s internalcontrol over financial reporting based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audits to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement and whether effective internal control over financialreporting was maintained in all material respects. Our audit of financialstatements included examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, and evaluatingthe overall financial statement presentation. Our audit of internal controlover financial reporting included obtaining an understanding of internalcontrol over financial reporting, evaluating management’s assessment, testingand evaluating the design and operating effectiveness of internal control, andperforming such other procedures as we considered necessary in thecircumstances. We believe that our audits provide a reasonable basis for ouropinions.

A company’s internal control over financialreporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples. A company’s internal control over financial reporting includesthose policies and procedures that (1) pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonable assurancethat transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat receipts and expenditures of the company are being made only in accordancewith authorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

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

In our opinion, the financial statementsreferred to above present fairly, in all material respects, the financialposition of **Northern Growers, LLC** as of December 31, 2006 and 2005, and theresults of its operations and its cash flows for each of the years in thethree-year period ended December 31,2006 in conformity with accounting principles generally accepted in theUnited States of America. Also, in our opinion, management’s assessment that **Northern Growers, LLC** maintained effective internal controlover financial reporting as of December31, 2006 is fairly stated, in all material respects, based on criteriaestablished in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO). Furthermore, in our opinion, **Northern Growers, LLC**maintained, in all material respects, effective internal control over financialreporting as of December 31, 2006,based on criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).
|  |   |
|--|--------|

Sioux Falls, South Dakota

March 14, 2007

PEOPLE.PRINCIPLES. POSSIBILITIES.

----

www.eidebailly.com200 E. 10th Street,Suite 500 · PO Box 5125 · SiouxFalls, South Dakota 57117-5125 · Phone 605.339.1999 · Fax605.339.1306 · EOE

F-1

----

# **NORTHERNGROWERS, LLC**

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                           | ** ** | **December 31,** | ** **      | **December 31,** | ** ** |
|--------------------------------------|------------|-----------------------|-----------------|-----------------------|------------|
| ** **                           | ** ** | **2006**              | ** **      | **2005**              | ** ** |
|                                 |       |                  |            |                  |       |
| **ASSETS**                           |       |                  |            |                  |       |
|                                 |       |                  |            |                  |       |
| CURRENT ASSETS                       |       |                  |            |                  |       |
| Cash                                 | ** ** | **$**                 | **9,925,200**   |                  | $          | 12,057,017 |   |
| Accounts receivable                  | ** ** | ** **            |            |                  |       |
| Trade related party                  | ** ** | **6,445,387**         |            | 3,596,642             |       |
| Trade                                | ** ** | **850,565**           |            | 428,129               |       |
| Other                                | ** ** | **911,359**           |            | 195,012               |       |
| Inventory                            | ** ** | **15,493,876**        |            | 3,782,616             |       |
| Prepaid expenses                     | ** ** | **81,992**            |            | 74,133                |       |
| Investment in  commodities contracts | ** ** | **1,121,151**         |            | 84,962                |       |
|                                 | ** ** | ** **            |            |                  |       |
| Total current assets                 | ** ** | **34,829,530**        |            | 20,218,511            |       |
|                                 | ** ** | ** **            |            |                  |       |
| PROPERTY AND  EQUIPMENT              | ** ** | ** **            |            |                  |       |
| Land improvements                    | ** ** | **5,105,996**         |            | 3,970,615             |       |
| Equipment                            | ** ** | **45,061,239**        |            | 34,620,861            |       |
| Buildings                            | ** ** | **9,349,073**         |            | 8,149,571             |       |
| Construction in progress             | ** ** | **18,017,902**        |            | 911,863               |       |
|                                 | ** ** | **77,534,210**        |            | 47,652,910            |       |
| Less accumulated depreciation        | ** ** | **(11,120,828**       | **)**           | (8,555,706            | )          |
|                                 | ** ** | ** **            |            |                  |       |
| Net property and equipment           | ** ** | **66,413,382**        |            | 39,097,204            |       |
|                                 | ** ** | ** **            |            |                  |       |
|                                 | ** ** | ** **            |            |                  |       |
| OTHER ASSETS                         | ** ** | **236,996**           |            | —                |       |
|                                 | ** ** | ** **            |            |                  |       |
|                                 | ** ** | ** **            |            |                  |       |
|                                 | ** ** | **$**                 | **101,479,908** |                  | $          | 59,315,715 |   |

 

See Notes toConsolidated Financial Statements

F-2

----

# **NORTHERNGROWERS, LLC**

# **CONSOLIDATED BALANCE SHEETS**

| ** **                                                                  | ** ** | **December 31,** | ** **      | **December 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------|-----------------|-----------------------|------------|
| ** **                                                                  | ** ** | **2006**              | ** **      | **2005**              | ** ** |
| ** **                                                                  |       |                  |            |                  |       |
| **LIABILITIES  AND MEMBERS’ EQUITY**                                   | ** ** | ** **            |            |                  |       |
|                                                                        | ** ** | ** **            |            |                  |       |
| CURRENT  LIABILITIES                                                        | ** ** | ** **            |            |                  |       |
| Accounts payable - trade                                                    | ** ** | **$**                 | **1,254,171**   |                  | $          | 1,662,410 |   |
| Accounts payable - corn                                                     | ** ** | **1,981,804**         |            | 2,363,338             |       |
| Accounts payable - related party                                            | ** ** | **896,678**           |            | 520,593               |       |
| Accounts payable - construction - related party                             | ** ** | **2,173,905**         |            | —                |       |
| Other accrued liabilities                                                   | ** ** | **548,909**           |            | 555,946               |       |
| Accrued interest                                                            | ** ** | **1,321**             |            | 3,847                 |       |
| Distribution payable - Northern Growers                                     | ** ** | **6,787,696**         |            | 3,212,093             |       |
| Distribution payable - minority member                                      | ** ** | **2,512,400**         |            | 950,775               |       |
| Notes payable - due upon demand                                             | ** ** | **5,000**             |            | 5,000                 |       |
| Current portion of notes payable                                            | ** ** | **2,685,475**         |            | 1,932,661             |       |
| Derivative financial instruments                                            | ** ** | **187,069**           |            | —                |       |
|                                                                        | ** ** | ** **            |            |                  |       |
| Total current liabilities                                                   | ** ** | **19,034,428**        |            | 11,206,663            |       |
|                                                                        | ** ** | ** **            |            |                  |       |
| LONG-TERM NOTES  PAYABLE                                                    | ** ** | **33,391,741**        |            | 17,104,400            |       |
|                                                                        | ** ** | ** **            |            |                  |       |
| COMMITMENTS AND  CONTINGENCIES                                              | ** ** | ** **            |            |                  |       |
|                                                                        | ** ** | ** **            |            |                  |       |
|                                                                        | ** ** | ** **            |            |                  |       |
| MINORITY  INTEREST                                                          | ** ** | **10,790,823**        |            | 7,054,934             |       |
|                                                                        | ** ** | ** **            |            |                  |       |
| MEMBERS’ EQUITY                                                        | ** ** | ** **            |            |                  |       |
| Capital units, $0.25 stated value, 50,628,000 units  issued and outstanding | ** ** | **12,657,000**        |            | 12,657,000            |       |
| Additional paid-in capital                                                  | ** ** | **64,900**            |            | 64,900                |       |
| Accumulated other comprehensive (loss)                                      | ** ** | **(144,342**          | **)**           | —                |       |
| Retained earnings                                                           | ** ** | **25,685,358**        |            | 11,227,818            |       |
|                                                                        | ** ** | ** **            |            |                  |       |
| Total members’ equity                                                  | ** ** | **38,262,916**        |            | 23,949,718            |       |
|                                                                        | ** ** | ** **            |            |                  |       |
|                                                                        | ** ** | **$**                 | **101,479,908** |                  | $          | 59,315,715 |   |

 

See Notes toConsolidated Financial Statements

F-3

----

# **NORTHERNGROWERS, LLC**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

 
| ** **                                                           | ** ** | **2006**        | ** **      | **2005**   | ** ** | **2004**   | ** ** |
|----------------------------------------------------------------------|------------|-----------------|-----------------|------------|------------|------------|------------|
| REVENUES                                                             | ** ** | ** **      |            |       |       |       |       |
| Sales related party                                                  | ** ** | **$**           | **105,702,927** |       | $          | 72,633,304 |       | $ | 68,501,969 |   |
| Sales                                                                | ** ** | **16,349,308**  |            | 16,305,319 |       | 16,486,472 |       |
| Incentive                                                            | ** ** | **784,884**     | ** **      | 754,085    | ** ** | 1,599,144  |       |
| Total revenues                                                       | ** ** | **122,837,119** | ** **      | 89,692,708 | ** ** | 86,587,585 |       |
|                                                                 | ** ** | ** **      |            |       |       |       |       |
| COST OF REVENUES                                                     |       | ** **      |            |       |       |       |       |
| Cost of revenues                                                     | ** ** | **62,731,376**  |            | 63,552,756 |       | 72,729,131 |       |
| Settlement credit - see Note 12                                      | ** ** | **—**      |            | —     |       | (1,449,248 | )          |
| Total cost of revenues                                               | ** ** | **62,731,376**  |            | 63,552,756 |       | 71,279,883 |       |
|                                                                 | ** ** | ** **      |            |       |       |       |       |
| GROSS PROFIT                                                         | ** ** | **60,105,743**  |            | 26,139,952 |       | 15,307,702 |       |
|                                                                 | ** ** | ** **      |            |       |       |       |       |
| EXPENSES                                                             | ** ** | ** **      |            |       |       |       |       |
| General and administrative                                           | ** ** | **6,364,983**   |            | 3,913,177  |       | 2,984,237  |       |
| Total operating expenses                                             | ** ** | **6,364,983**   |            | 3,913,177  |       | 2,984,237  |       |
|                                                                 | ** ** | ** **      |            |       |       |       |       |
| INCOME FROM  OPERATIONS                                              | ** ** | **53,740,760**  |            | 22,226,775 |       | 12,323,465 |       |
|                                                                 | ** ** | ** **      |            |       |       |       |       |
| OTHER INCOME  (EXPENSES)                                             | ** ** | ** **      |            |       |       |       |       |
| Interest income                                                      | ** ** | **334,512**     |            | 75,682     |       | 10,780     |       |
| Interest expense                                                     | ** ** | **(1,271,243**  | **)**           | (1,420,827 | )          | (1,500,438 | )          |
| Other                                                                | ** ** | **31,603**      |            | 124,545    |       | 65,551     |       |
| Total other income (expenses)                                        | ** ** | **(905,128**    | **)**           | (1,220,600 | )          | (1,424,107 | )          |
|                                                                 | ** ** | ** **      |            |       |       |       |       |
| INCOME BEFORE  MINORITY INTEREST                                     | ** ** | **52,835,632**  |            | 21,006,175 |       | 10,899,358 |       |
|                                                                 | ** ** | ** **      |            |       |       |       |       |
| MINORITY  INTEREST IN SUBSIDIARY (INCOME)                            | ** ** | **(12,132,284** | **)**           | (4,848,463 | )          | (2,528,026 | )          |
|                                                                 | ** ** | ** **      |            |       |       |       |       |
| NET INCOME                                                           | ** ** | **$**           | **40,703,348**  |       | $          | 16,157,712 |       | $ | 8,371,332 |   |
|                                                                 |       | ** **      |            |       |       |       |       |
|                                                                 |       | ** **      |            |       |       |       |       |
|                                                                 | ** ** | ** **      |            |       |       |       |       |
| BASIC AND  DILUTED EARNINGS PER CAPITAL UNIT                         | ** ** | **$**           | **0.804**       |       | $          | 0.319      |       | $ | 0.165 |   |
|                                                                 | ** ** | ** **      |            |       |       |       |       |
| BASIC AND  DILUTED WEIGHTED AVERAGE  CAPITAL UNITS  OUTSTANDING | ** ** | **50,628,000**  |            | 50,628,000 |       | 50,628,000 |       |
|                                                                 | ** ** | ** **      |            |       |       |       |       |
| DISTRIBUTIONS  PER CAPITAL UNIT DECLARED                             | ** ** | **$**           | **0.518**       | ** ** | $          | 0.230      | ** ** | $ | 0.118 |   |
|                                                                 | ** ** | ** **      | ** **      |       | ** ** |       |       |
| DISTRIBUTIONS  PER CAPITAL UNIT PAID                                 | ** ** | **$**           | **0.448**       | ** ** | $          | 0.241      | ** ** | $ | 0.070 |   |

 

See Notes to Consolidated Financial Statements

F-4

----

# **NORTHERNGROWERS, LLC**

**CONSOLIDATED STATEMENTS OFCHANGES IN MEMBERS’ EQUITY ANDCOMPREHENSIVE INCOME**

**YEARS ENDED DECEMBER 31, 2006,2005 AND 2004**
| ** **                     | ** ** | **Capital  Units** | ** ** | **Amount** | ** **     | **Additional  Paid-In  Capital** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Retained  Earnings** | ** **   | **Total**   | ** ** | **Annual  Comprehensive  Income (Loss)** | ** **     |
|--------------------------------|------------|--------------------|------------|------------|----------------|----------------------------------|------------|-----------------------------------------------------------|------------|------------------------|--------------|-------------|------------|-----------------------------------------------|----------------|
| BALANCE,  JANUARY 1, 2004      |       | 50,628,000         |       | 12,657,000 |           | 64,900                           |       | —                                                    |       | 4,345,795              |         | 17,067,695  |       | —                                        |           |
|                           |       |               |       |       |           |                             |       |                                                      |       |                   |         |        |       |                                          |           |
| Net income                     |       | —             |       | —     |           | —                           |       | —                                                    |       | 8,371,332              |         | 8,371,332   |       | 8,371,332                                     |           |
| Distributions  payable         |       | —             |       | —     |           | —                           |       | —                                                    |       | (3,778,051             | )            | (3,778,051  | )          | —                                        |           |
| Distributions  paid            |       | —             |       | —     |           | —                           |       | —                                                    |       | (2,214,975             | )            | (2,214,975  | )          | —                                        |           |
|                           |       |               |       |       |           |                             |       |                                                      |       |                   |         |        |       |                                          |           |
| BALANCE, DECEMBER  31, 2004    |       | 50,628,000         |       | 12,657,000 |           | 64,900                           |       | —                                                    |       | 6,724,101              |         | 19,446,001  | ** ** | **$**                                         | **8,371,332**  | ** ** |
|                           |       |               |       |       |           |                             |       |                                                      |       |                   |         |        |       |                                          |           |
| Net income                     |       | —             |       | —     |           | —                           |       | —                                                    |       | 16,157,712             |         | 16,157,712  |       | 16,157,712                                    |           |
| Distributions  payable         |       | —             |       | —     |           | —                           |       | —                                                    |       | (3,212,093             | )            | (3,212,093  | )          | —                                        |           |
| Distributions  paid            |       | —             |       | —     |           | —                           |       | —                                                    |       | (8,441,902             | )            | (8,441,902  | )          | —                                        |           |
|                           |       |               |       |       |           |                             |       |                                                      |       |                   |         |        |       |                                          |           |
| BALANCE, DECEMBER 31,  2005    |       | 50,628,000         |       | 12,657,000 |           | 64,900                           |       | —                                                    |       | 11,227,818             |         | 23,949,718  | ** ** | **$**                                         | **16,157,712** | ** ** |
|                           |       |               |       |       |           |                             |       |                                                      |       |                   |         |        |       |                                          |           |
| Net income                     |       | —             |       | —     |           | —                           |       | —                                                    |       | 40,703,348             |         | 40,703,348  |       | 40,703,348                                    |           |
| Cash flow hedge  (loss)        |       | —             |       | —     |           | —                           |       | (144,342                                                  | )          | —                 |         | (144,342    | )          | (144,342                                      | )              |
| Distributions  payable         |       | —             |       | —     |           | —                           |       | —                                                    |       | (6,787,696             | )            | (6,787,696  | )          | —                                        |           |
| Distributions  paid            |       | —             |       | —     |           | —                           |       | —                                                    |       | (19,458,112            | )            | (19,458,112 | )          | —                                        |           |
|                           |       |               |       |       |           |                             |       |                                                      |       |                   |         |        |       |                                          |           |
| **BALANCE, DECEMBER 31, 2006** | ** ** | **50,628,000**     | ** ** | **$**      | **12,657,000** | ** **                       | **$**      | **64,900**                                                | ** ** | **$**                  | **(144,342** | **)**       | **$**      | **25,685,358**                                | ** **     | **$** | **38,262,916** | ** ** | **$** | **40,559,006** | ** ** |
|                                |            |                    |            |            |                |                                  |            |                                                           |            |                        |              |             |            |                                               |                |  |  |  |  |  |  |

 

See Notes to ConsolidatedFinancial Statements

F-5

----

# **NORTHERNGROWERS, LLC**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**YEARS ENDED****DECEMBER 31, 2006, 2005 AND 2004**

 
| ** **                                      | ** ** | **2006**        | ** **     | **2005**    | ** ** | **2004**   | ** ** |
|-------------------------------------------------|------------|-----------------|----------------|-------------|------------|------------|------------|
| OPERATING  ACTIVITIES                           |       |            |           |        |       |       |       |
| Net income                                      | ** ** | **$**           | **40,703,348** |        | $          | 16,157,712 |       | $ | 8,371,332 |   |
| Changes to net income not affecting cash        |       |            |           |        |       |       |       |
| Depreciation                                    | ** ** | **2,758,668**   |           | 2,613,727   |       | 2,531,969  |       |
| Amortization of loan fees                       | ** ** | **9,701**       |           | 102,818     |       | 102,848    |       |
| Loss on impairment of assets                    | ** ** | **450,362**     |           | 355,177     |       | —     |       |
| Minority interest in subsidiary’s earnings | ** ** | **12,132,284**  |           | 4,848,463   |       | 2,528,026  |       |
| Decrease (increase) in current assets           |       |            |           |        |       |       |       |
| Accounts receivable                             |       |            |           |        |       |       |       |
| Related party                                   | ** ** | **(2,848,745**  | **)**          | 78,553      |       | (84,243    | )          |
| Trade                                           | ** ** | **(422,436**    | **)**          | 113,517     |       | (40,761    | )          |
| Other                                           | ** ** | **(29,163**     | **)**          | 682,345     |       | (574,811   | )          |
| Inventory                                       | ** ** | **(11,711,260** | **)**          | 856,945     |       | (338,657   | )          |
| Prepaid expenses                                | ** ** | **(7,859**      | **)**          | 270,570     |       | (245,115   | )          |
| Investment in commodity contracts               | ** ** | **(1,036,189**  | **)**          | 25,989      |       | 73,671     |       |
| Increase (decrease) in current liabilities      |       |            |           |        |       |       |       |
| Accounts payable                                |       |            |           |        |       |       |       |
| Trade                                           | ** ** | **(408,239**    | **)**          | 428,227     |       | (139,393   | )          |
| Corn                                            | ** ** | **(381,534**    | **)**          | (680,757    | )          | (1,134,955 | )          |
| Related party                                   | ** ** | **376,085**     |           | 141,962     |       | 174,411    |       |
| Accrued liabilities                             | ** ** | **55,732**      |           | 124,356     |       | (98,683    | )          |
| Accrued interest                                | ** ** | **(2,526**      | **)**          | (3,593      | )          | (2,679     | )          |
|                                            |       |            |           |        |       |       |       |
| NET CASH  PROVIDED BY OPERATING ACTIVITIES      |       | **39,638,229**  |           | 26,116,011  |       | 11,122,960 |       |
|                                            |       |            |           |        |       |       |       |
| INVESTING  ACTIVITIES                           |       |            |           |        |       |       |       |
| Purchase of property and equipment              | ** ** | **(28,844,044** | **)**          | (1,426,068  | )          | (2,108,018 | )          |
| Cash received on sale of assets                 | ** ** | **31,100**      |           | —      |       | —     |       |
| Cash paid for capitalized construction interest | ** ** | **(288,312**    | **)**          | —      |       | —     |       |
| Tax refund on construction                      | ** ** | **—**      |           | 200,570     |       | 57,723     |       |
|                                            |       |            |           |        |       |       |       |
| NET CASH (USED  FOR) INVESTING ACTIVITIES       | ** ** | **(29,101,256** | **)**          | (1,225,498  | )          | (2,050,295 | )          |
|                                            |       |            |           |        |       |       |       |
| FINANCING  ACTIVITIES                           |       |            |           |        |       |       |       |
| Long-term notes payable issued                  | ** ** | **18,959,874**  |           | 1,032,369   |       | —     |       |
| Principal paid on long-term notes payable       | ** ** | **(1,919,718**  | **)**          | (1,446,148  | )          | (3,737,459 | )          |
| Distributions paid - Northern Growers           | ** ** | **(22,670,206** | **)**          | (12,219,954 | )          | (3,558,199 | )          |
| Distributions paid - minority member            | ** ** | **(6,792,043**  | **)**          | (3,700,080  | )          | (1,142,000 | )          |
| Cash paid for financing costs                   | ** ** | **(246,697**    | **)**          | —      |       | —     |       |
|                                            |       |            |           |        |       |       |       |
| NET CASH (USED  FOR) FINANCING ACTIVITIES       | ** ** | **(12,668,790** | **)**          | (16,333,813 | )          | (8,437,658 | )          |
|                                            |       |            |           |        |       |       |       |
| NET INCREASE  (DECREASE) IN CASH                | ** ** | **(2,131,817**  | **)**          | 8,556,700   |       | 635,007    |       |
|                                            |       |            |           |        |       |       |       |
| CASH AT  BEGINNING OF YEAR                      | ** ** | **12,057,017**  |           | 3,500,317   |       | 2,865,310  |       |
|                                            |       |            |           |        |       |       |       |
| CASH AT END OF  YEAR                            | ** ** | **$**           | **9,925,200**  |        | $          | 12,057,017 |       | $ | 3,500,317 |   |

 

See Notes to Consolidated Financial Statements

(continued on nextpage)

 

F-6

----

**CONSOLIDATED STATEMENTS OF CASHFLOWS — page 2**

 
| ** **                                                               | ** ** | **2006** | ** **    | **2005** | ** ** | **2004**   | ** ** |
|--------------------------------------------------------------------------|------------|----------|---------------|----------|------------|------------|------------|
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION                       |       |     |          |     |       |       |       |
| Cash paid for interest                                                   | ** ** | **$**    | **1,552,337** |     | $          | 1,321,551  |       | $ | 1,400,270 |   |
|                                                                     |       |     |          |     |       |       |       |
| SUPPLEMENTAL  DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES |       |     |          |     |       |       |       |
| Accounts payable incurred for construction costs                         | ** ** | **$**    | **2,173,905** |     | $          | 62,769     |       | $ | 108,121 |   |
| Accounts receivable for tax refund on construction                       | ** ** | **$**    | **687,184**   |     | $          | —     |       | $ | — |   |
| Notes payable refinanced                                                 | ** ** | **$**    | **—**    |     | $          | 18,667,631 |       | $ | — |   |
| Distributions payable                                                    | ** ** | **$**    | **9,300,096** |     | $          | 4,162,868  |       | $ | 3,778,051 |   |
|                                                                     |       |     |          |     |       |       |       |

 

See Notes to ConsolidatedFinancial Statements

F-7

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# **NORTHERNGROWERS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

**NOTE 1 -       NATURE OF OPERATIONS**

*PrincipalBusiness Activity*

Northern Growers, LLC orNorthern Growers (formerly Northern Growers Cooperative or the “Cooperative”),is a South Dakota limited liability company that was organized to poolinvestors, provide a portion of the corn supply for a 40 million gallonname-plate annual capacity ethanol plant “the plant” owned by Northern LightsEthanol, LLC “Northern Lights”, and own a 77.16% interest in NorthernLights.  For purposes of the financialstatements and notes, the “Company” refers to both Northern Growers andNorthern Lights on a consolidated basis. Northern Lights was formed on February 14, 2001. On June 26,2002, the plant began grinding corn and on July 5, 2002, the plantcommenced its principal operations. The Company sells ethanol and relatedproducts primarily in the United States.

On April 1, 2002,Whetstone Ethanol, LLC “Whetstone” was formed. The initial member of Whetstonewas the Cooperative. Whetstone was formed for the purpose of acquiring theassets and liabilities of the Cooperative. On April 10, 2002, the Board ofDirectors of the Cooperative approved a plan of reorganization related to anexchange whereby Whetstone would acquire the assets and liabilities of theCooperative. On March 27, 2003, the members of the Cooperative approved theplan of reorganization to take effect on April l, 2003. The transaction was anexchange of interests whereby the assets and liabilities of the Cooperativewere transferred for capital units of Whetstone. For financial statementspurposes, no gain or loss was recorded as a result of the exchange transaction.

As a result of theexchange, the Cooperative was dissolved, with Whetstone’s capital units distributedto the members of the Cooperative at a rate of one Whetstone capital unit foreach share of equity common stock and all voting common stock of theCooperative surrendered and retired. In connection with the reorganization,Whetstone subsequently changed its name to Northern Growers, LLC. Under theamended Northern Growers’ Operating Agreement, a minimum of 2,500 capital unitsis required to become a member.  Suchunits are subject to certain transfer restrictions, including approval by theBoard of Managers of Northern Growers. Northern Growers also retains the rightto redeem the capital units at $.20 per unit in the event a member attempts todispose of the units in a manner not in conformity with the OperatingAgreement, if a member becomes a holder of less than 2,500 units or if a memberbecomes bankrupt. The Operating Agreement also includes provisions whereby cashflow in excess of $200,000 will be distributed to unit holders subject tolimitations imposed by a super majority vote of the Board of Managers orrestrictions imposed by loan covenants.

**NOTE 2 -       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

*Principlesof Consolidation*

The consolidated financial statements include the accounts of NorthernGrowers and its 77.16% owned subsidiary, Northern Lights. All significantinter-company transactions and balances have been eliminated in consolidation.

*Cash andCash Equivalents*

Cash and cashequivalents consist of demand accounts and other accounts that providewithdrawal privileges.

F-8

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# **NORTHERNGROWERS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

* *

*RevenueRecognition*

Revenue from the production of ethanol and related product is recordedupon transfer of title to customers, net of allowances for estimated returns onrelated products. Generally, ethanol is shipped FOB shipping point and relatedproduct is shipped FOB destination. Interest income is recognized as earned.

Revenue fromfederal and state incentive programs is recorded when the Company has producedor sold the ethanol and satisfied the reporting requirements under eachapplicable program. When it is uncertain that the Company will receive fullallocation and payment due under the incentive programs, it derives an estimateof the incentive revenue for the relevant period based on various factors. Theestimate is subject to change as management becomes aware of increases ordecreases in the amount of funding available under the incentive programs orother factors that affect funding or allocation of funds under such programs.

*ShippingCosts*

Freight chargesincurred are reported as a component of cost of revenues.

*Receivablesand Credit Policies*

Trade receivables are uncollateralized customerobligations due under normal trade terms requiring payment within 30 days fromthe invoice date. Customer account balances with invoices dated over 30 daysold are considered delinquent. Interest is not charged on any delinquentaccounts.

Trade receivables are stated at the amount billed tothe customer.

Payments of trade receivables are allocated to thespecific invoices identified on the customer’s remittance advice or, ifunspecified, are applied to the earliest unpaid invoices.

The carryingamount of trade receivables is reduced by a valuation allowance that reflectsmanagement’s best estimate of the amounts that will not be collected.Management reviews all trade receivable balances that exceed 30 days from theinvoice date and based on an assessment of current creditworthiness, estimatesthe portion, if any, of the balance that will not be collected. Managementbelieves that all trade receivables are collectible; therefore, there is novaluation allowance as of December 31, 2006 and 2005.

*Inventory*

Ethanol andrelated product inventory is stated at net realizable value. Corn inventory isstated at market value, which approximates net realizable value (local marketprices less cost of disposal), based on local market prices determined by grainterminals in the area of the plant. Other raw materials, spare parts andwork-in-process inventory are stated at the lower of cost or market on anaverage cost method.

Inventories at December 31, 2006 and 2005 are as follows:

|                        | ** ** | **2006**       | ** **     | **2005**   | ** ** |
|------------------------|------------|----------------|----------------|------------|------------|
| ** **             | ** ** | ** **     | ** **     | ** ** | ** ** |
| Finished goods         | ** ** | **$**          | **3,256,330**  |       | $          | 1,983,179 |   |
| Raw materials          | ** ** | **10,461,893** |           | 660,045    |       |
| Work-in-process        | ** ** | **807,185**    |           | 326,018    |       |
| Spare parts  inventory | ** ** | **968,468**    |           | 813,374    |       |
|                   | ** ** | **$**          | **15,493,876** |       | $          | 3,782,616 |   |

 

F-9

----

# **NORTHERNGROWERS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

*Investmentin Commodities Contracts, Derivative Instruments and Hedging Activities*

SFASNo. 133 requires a company to evaluate its contracts to determine whether thecontracts are derivatives. Certain contracts that literally meet the definitionof a derivative may be exempted from SFAS No. 133 as normal purchases or normalsales. Normal purchases and normal sales are contracts that provide for thepurchase or sale of something other than a financial instrument or derivativeinstrument that will be delivered in quantities expected to be used or soldover a reasonable period in the normal course of business. Contracts that meetthe requirements of normal are documented as normal and exempted from theaccounting and reporting requirements of SFAS No. 133.

TheCompany enters into short-term cash, options and futures contracts as a meansof securing corn and natural gas for the ethanol plant and managing exposure tochanges in commodity prices. All derivatives are designated as non-hedgederivatives. Although the contracts are effective economic hedges of specifiedrisks, they are not designated as and accounted for as hedging instruments.

Aspart of its trading activity, the Company uses futures and option contractsoffered through regulated commodity exchanges to reduce risk and is exposed torisk of loss in the market value of inventories. To reduce that risk, theCompany generally takes positions using cash and futures contracts and options.

Unrealizedgains and losses related to derivative contracts are included as a component ofcost of revenues in the accompanying consolidated financial statements. Inventoriesare recorded at net realizable value so that gains and losses on derivativecontracts are offset by gains and losses on inventories and reflected incurrent earnings. For the statement of cash flows, such contract transactionsare classified as operating activities.

The Company has recorded an increase (decrease) tocost of revenues of $3,181,810, ($211,011) and $3,719,496 related to ourderivative contracts for the year ended December 31, 2006, 2005 and 2004,respectively.  These derivative contractscan be found on the Balance Sheet under “Investment in commodities contracts”.

During the year ended December 31, 2006, theCompany entered into derivative financial instruments to limit its exposure tochanges in interest rates.  The Companyentered into an interest rate swap agreement as part of its interest rate riskmanagement strategy and to effectively convert a portion of its variable ratedebt to fixed rate debt.  The swapagreement is accounted for as a cash flow hedge under SFAS No. 133, as amended.  The Company did not have any derivativeinstruments designated as cash flow hedges as of December 31, 2005.

*InterestRate Swap Agreement*

During the year ended December 31, 2006, the Company entered into aninterest rate swap agreement as part of its interest rate risk managementstrategy and to effectively convert a portion of its variable rate debt tofixed rate debt.  The swap agreement,which expires August 31, 2014, is accounted for as a cash flow hedge under SFASNo. 133, as amended.  Under the terms ofthe swap, the Company’s net payment is a fixed interest rate on the notionalamount in exchange for receiving a variable rate based on one month LIBOR. Theswap transaction qualifies for the shortcut method of recognition under SFASNo. 133; therefore, no portion of the swap is treated as ineffective. Thenotional amount of the interest rate swap as of December 31, 2006 was$16,252,000.  As of December 31, 2006,$187,069 has been recorded as a current derivative liability to record the fairvalue of the swap, with a corresponding entry of $144,342 to accumulated othercomprehensive loss in the members’ equity section of the balance sheet and adecrease of $42,727 to minority interest.

F-10

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# **NORTHERNGROWERS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

*OtherComprehensive Income (Loss)*

The Company has adopted Statement of FinancialAccounting Standards No. 130, Reporting Comprehensive Income (“SFAS 130”)that establishes standards for reporting comprehensive income. The Statementdefines comprehensive income as the changes in equity of an enterprise exceptthose resulting from stockholder transactions. As of December 31, 2006,accumulated other comprehensive loss consists of an unrealized loss from ourinterest rate swap agreement designated as a cash flow hedge.

*MinorityInterest*

Amounts recorded as minority interest on thebalance sheet relate to the investment by Broin Investments I, LLC in NorthernLights, plus or minus any allocation of income or loss of Northern Lights, plusor minus any allocation of accumulated other comprehensive income or loss, lessdistributions from Northern Lights. Earnings/losses and distributions ofNorthern Lights are allocated to its members in proportion to the member’scapital accounts.

*Use ofEstimates*

The preparation of financial statements inconformity with generally accepted accounting principles requires management tomake estimates and assumptions that affect the reported amount of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and revenues and expenses during the reporting period.Actual results could differ from those estimates.

*Concentrationsof Credit Risk*

Cash balances aremaintained in bank depositories and periodically exceed federally insuredlimits.

*Propertyand Equipment*

Property andequipment is stated at cost. Significant additions and betterments arecapitalized, while expenditures for maintenance, repairs and minor renewals arecharged to operations when incurred. Depreciation on assets placed in serviceis computed using the straight-line method over estimated useful lives asfollows:

| Land improvements |   | 8-40 years  |
|-------------------|--------|-------------|
| Equipment         |   | 3-20 years  |
| Buildings         |   | 10-40 years |

 

Land improvementsconsist of landscaping, additional fencing and improvements to the roads forentering and exiting the plant.

Equipment consistsof grain systems, trucks, mechanical and electrical production and processequipment, cooling towers, boilers and a reboiler, field sensors and powersupplies.

Buildings consistsof administrative offices, sheds, catwalks, platforms, and mechanical and grainbuildings.

The Companyreviews its property and equipment for impairment whenever events indicate thatthe carrying amount of the asset may not be recoverable. An impairment loss isrecorded when the sum of the future cash flows is less than the carrying amountof the asset. An impairment loss is measured as the amount by which thecarrying amount of the asset exceeds its fair value.

F-11

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# **NORTHERNGROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

A loss on impairment ofassets of $450,362 was recognized by the Company’s management during October2006 and is included in cost of revenues.  With the completion andincorporation of BPXTM technology into the plant production processon October 12, 2006, there were multiple tanks, motors and other equipment thatwere deemed unusable.  Two tanks were sold and the balance of theequipment was determined to have no value and that any scrap value theequipment had would approximate the costs of disposal.

A loss onimpairment of assets for $355,177 was recognized by the Company’s managementduring October 2005 and is included in cost of revenues.  A subset of the thermal oxidizers was deemedimpaired/inoperable and no longer useful due to extreme internal heat damage,although the plant continues to meet all regulatory requirements without theoperation of this subset of the thermal oxidizers.  Due to the extreme degradation of the equipment,it was determined to have no value and that any scrap value the equipment hadwould approximate the costs of disposal.

# *Environmental Liabilities*

The Company’soperations are subject to environmental laws and regulations adopted by variousgovernmental authorities in the jurisdiction in which it operates. These lawsrequire the Company to investigate and remediate the effects of the release ordisposal of materials at its locations. Accordingly, the Company has adoptedpolicies, practices and procedures in the areas of pollution control,occupational health, and the production, handling, storage and use of hazardousmaterials to prevent material environmental or other damage, and to limit thefinancial liability which could result from such events. Environmentalliabilities are recorded when the liability is probable and the costs can bereasonably estimated.

*IncomeTaxes*

The Company is nota taxpaying entity for federal and state income tax purposes and thus no incometax expense has been recorded in the statements. Income of the Company is taxedto the members in their respective returns.

*Cost ofRevenues*

The primarycomponents of cost of revenues from the production of ethanol and relatedproducts are corn expense, energy expense (steam, natural gas and electricity),raw materials expense (chemicals and denaturant), shipping costs on sales anddepreciation on process equipment.

All shipping costsincurred with regard to the sale of ethanol and related product inventory areincluded in the consolidated statements of operations as a component of grossrevenues. Accordingly, those shipping costs are deducted and are all classifiedas a component of cost of revenues. Shipping costs in relation to sales aredefined as the cost to transport products to customers. Other shipping costs inthe cost of revenues include inbound freight charges on inventory.

*Generaland Administrative Expenses*

The primarycomponents of general and administrative expenses are management fees,insurance expense and professional fees (legal and audit).

*Recently Issued Accounting Pronouncements*

In September 2006,the FASB issued Statement No. 157, “Fair Value Measurements”. This Statementdefines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles and expands 

F-12

----

# **NORTHERN GROWERS,LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

disclosure aboutfair value measurement. The implementation of this guidance is not expected tohave a material impact on the Company’s financial statements.

In September 2006,the United States Securities and Exchange Commission (“SEC”), adopted SAB No.108, “Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements.” This SAB provides guidanceon the consideration of the effects of prior year misstatements in quantifyingcurrent year misstatements for the purpose of a materiality assessment. SAB 108establishes an approach that requires quantification of financial statementerrors based on the effects of each of the company’s balance sheets andstatements of operations and the related financial statement disclosures. TheSAB permits existing public companies to record the cumulative effect ofinitially applying this approach in the first year ending after November 15,2006 by recording the necessary correcting adjustments to the carrying valuesof assets and liabilities as of the beginning of that year with the offsettingadjustment recorded to the opening balance of retained earnings. Additionally,the use of the cumulative effect transition method requires detailed disclosureof the nature and amount of each individual error being corrected through thecumulative adjustment and how and when it arose. The Company expects that theadoption of SAB 108 will not have a material impact on its financialstatements.

In July 2006, theFASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in IncomeTaxes-an Interpretation of FASB Statement No. 109.” This Interpretationprescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return. This Interpretation also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition. The Interpretation is effective for fiscalyears beginning after December 15, 2006 and the Company expects that theadoption of FASB Interpretation No. 48 will not have a material impact on itsfinancial statements.

**NOTE 3 -       NOTES PAYABLE**

*Short-TermNotes Payable*

Northern Growersreceived advances of $5,000 from various entities to help establish theCompany. The notes are due on demand and do not bear interest.  The balance of this non-interest bearing notewas $5,000 at December 31, 2006 and 2005.

*Long-Term Notes Payable*

 Prior to entering into a refinancing agreementon March 30, 2005, Northern Lights had four loans outstanding with US BankNational Association, Sioux Falls, South Dakota (Bank):  a $15.0 million fixed-rate note; an $11.1million variable-rate non-revolving note; a $5.0 million variable-rate,revolving note; and a $1.2 million fixed-rate note. The financing arrangementsfor the fixed rate note required Northern Lights to make additional principalpayments equal to 15% of its excess cash flow (as defined by the agreement),not to exceed 20% of the outstanding principal balance. In conjunction with theNorthern Lights distributions on February 10, 2004 and November 12, 2004,additional excess cash flow payments of $335,664 and $590,044, respectively,were made on the fixed-rate note.

On March 30,2005, Northern Lights and the Bank entered into an amended loanagreement.  The purpose of the agreement was to refinance existing debtand to finance a planned rail expansion project.  Effective March 30,2005, five loans with the Bank became outstanding:  a $15.8 millionfixed-rate note; a $3.9 million variable-rate, non-revolving note; the $5million variable-rate, revolving note; a $3.0 million variable-rate, revolvingnote; and the $1.2 million note.  As part of the refinancing, the $15million fixed-rate note and the $11.1 million variable-

F-13

----

# **NORTHERNGROWERS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

rate,non-revolving note were retired and an additional $1,032,369 was borrowed forthe rail expansion project and included in the refinancing.

The $15.8 millionfixed-rate note bears an interest rate of 6.38%.  This note requiresquarterly payments of interest and amortized principal on the basis of aten-year term and is subject to maturity on March 31, 2012. The firstpayment was made on June 30, 2005.

The $3.9 millionvariable-rate, non-revolving note bears interest at the Bank’s prime rate, or8.25% at December 31, 2006. This note requires quarterly payments of interestand amortized principal on the basis of a ten-year term, the first paymentbeing made on June 30, 2005.  The note matures on March 31,2012.

The $1.2 millionfixed rate note bears interest at 4.7%, and requires quarterly payments ofprincipal and interest until maturity on April 30, 2007.

On August 28,2006, Northern Lights entered into an amended and restated loan agreement withthe Bank for the purpose of financing the plant’s expansion and restructuringthe $3.0 million and $5.0 million revolving notes into one note.  The newconstruction note is for a sum of $33 million. Half of the loan is subject tothe interest rate swap agreement discussed in Note 2 under “Interest Rate SwapAgreement”.  On October 16, 2006, theBank funded to us $16,252,360 in one lump sum under the construction notesubject to the interest rate swap agreement.  The construction loan willbe converted to a term loan no later than August 31, 2007 under the restatedloan agreement. The term loan will be subject to two interest rate options atthe time of conversion, a variable-interest rate or a fixed interest rate. Thevariable rate will be subject to the same rate as the prime rate constructionloan, while the term loan will be subject to a rate agreed to between theparties. Regardless of the rate, the loan will be amortized over a ten-yearperiod commencing August 31, 2007 and is subject to a maturity no later thanAugust 31, 2014. Payments of principal and interest are due quarterly beginningNovember 30, 2007.

The restated loanagreement restructures the $3.0 million and $5.0 million notes into a single $8million revolving note. The new revolving note permits Northern Lights toborrow, on a revolving basis, the difference between the unpaid principalbalance and $8 million. The revolving note bears a variable-interest rate equalto the prime rate announced by the Bank from time to time, adjusted each timethe Prime Rate changes. Quarterly payments of interest on any unpaid balanceare due March 31, June 30, September 30, and December 31 of each year. Thetotal unpaid principal balance is due at maturity, or August 31, 2014. The loanis subject to a quarterly unused commitment fee of .0375% and prepayment iswithout penalty.

Northern Lights issubject to certain restrictive covenants establishing minimum reportingrequirements, ratios, working capital and net worth requirements and is in fullcompliance at December 31, 2006. Collateral for the notes is multiple mortgages and security agreements,multiple UCC filings on all business assets, and assignments of certainagreements related to the construction and operation of the plant.

F-14

----

# **NORTHERNGROWERS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

The balance of thelong-term notes payable as of December 31, 2006 and 2005 is as follows:
| ** **                                    | ** ** | **2006**       | ** **     | **2005**   | ** ** |
|-----------------------------------------------|------------|----------------|----------------|------------|------------|
|                                          | ** ** | ** **     |           |       |       |
| Refinanced variable  rate, non-revolving note | ** ** | **$**          | **3,217,500**  |       | $          | 3,607,500 |   |
| Refinanced fixed rate  note                   | ** ** | **13,733,942** |           | 14,946,566 |       |
| Fixed rate note                               | ** ** | **165,901**    |           | 482,995    |       |
| Construction note                             | ** ** | **18,959,873** |           | —     |       |
|                                          | ** ** | ** **     |           |       |       |
|                                          | ** ** | **36,077,216** |           | 19,037,061 |       |
| Less current portion                          | ** ** | **(2,685,475** | **)**          | (1,932,661 | )          |
|                                          | ** ** | ** **     |           |       |       |
|                                          | ** ** | **$**          | **33,391,741** |       | $          | 17,104,400 |   |

 

At December 31, 2006 and2005, there were no outstanding borrowings against the variable rate revolvingnotes and the balance available on these notes was $8,000,000.

Minimum principalpayments, through the maturity of the notes, are estimated as follows:

| Year Ending December 31, | ** ** | **Amount** | ** ** |
|-----------------------------------------|------------|------------|------------|
|                                    |       |       |       |
| 2007                                    |       | $          | 2,685,475  |   |
| 2008                                    |       | 1,779,819  |       |
| 2009                                    |       | 1,870,634  |       |
| 2010                                    |       | 1,967,383  |       |
| 2011                                    |       | 2,070,453  |       |
| 2012 to August 31, 2014                 |       | 25,703,452 |       |
|                                    |       |       |       |
|                                    |       | $          | 36,077,216 |   |

 

**NOTE 4 -       RELATED PARTY TRANSACTIONS**

Northern Growers and Broin Investments I, LLC, are the members ofNorthern Lights. Northern Growers invested $12,500,000 and Broin Investments I,LLC invested $3,700,000 in Northern Lights Ethanol, LLC for their respectiveownership interests of approximately 77% and 23%. In accordance with theOperating Agreement of Northern Lights, Broin Investments I, LLC, has the rightto elect two of seven members of the Board of Managers of Northern Lights.

 

Additional agreements with related parties are included in Note 6.

**NOTE 5 -       FAIR VALUE OF FINANCIAL INSTRUMENTS**

The Company believes the carrying amount of cash and cash equivalentsapproximates fair value due to the short maturity of these instruments.

 

As of December 31, 2005, and subsequent to the refinancing in March2005, the Company believed the carrying amount of long-term note payableobligations exceeded fair value. As the following table presents, the carrying 

F-15

----

# **NORTHERNGROWERS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

amount of long-term note payable obligations exceeds the fair value byapproximately $348,000 and $840,000 at December 31, 2006 and 2005,respectively.

|                                            | ** ** | **Carrying Amount** | ** **     | **Fair Value** | ** ** |
|--------------------------------------------|------------|--------------------------|----------------|---------------------|------------|
|                                       | ** ** | ** **               |           |                |       |
| Long-term notes payable  December 31, 2006 | ** ** | **$**                    | **36,077,216** | ** **          | **$**      | **35,728,911** | ** ** |
| Long-term notes payable  December 31, 2005 | ** ** | **$**                    | **19,037,061** | ** **          | **$**      | **18,195,089** | ** ** |

 

The Companybelieves the carrying amount of short-term notes payable approximates theirvalue due to the short maturity of these instruments.

**NOTE 6 -       COMMITMENTS, CONTINGENCIES AND AGREEMENTS**

Substantially all of the Company’s facilities are subject to federal,state and local regulations relating to the discharge of materials into theenvironment. Management believes that the current practices and procedures forthe control and disposition of such wastes comply with the applicable federal,state and local requirements.

 

The Company has entered into contracts and agreements regarding theconstruction, operation and management of the ethanol plant. Agreements withBroin Investments I, LLC, the minority member of Northern Lights, or partiesrelated to the minority member through common ownership, are as follows:

 

Original Construction Agreement —The Company had a construction agreement with Broin and Associates, Inc., anaffiliate of the minority member of Northern Lights. The agreement, with changeorders, totals $47,615,981, all of which was complete as of December 31, 2006.

Expansion Construction Agreement —The Company entered into a Design/Build Agreement with Broin and Associates onOctober 25, 2005. The purpose of this agreement is to expand thename-plate production capacity of the plant from 40 million gallons of ethanolannually to 75 million gallons of ethanol annually, as well as to make certaincapital improvements to the plant for the incorporation of new raw starchtechnology. The estimated cost of construction and improvements for bothprojects is $42.4 million, with a remaining commitment of $14.0 million to bemet with the balance of the US Bank construction note.  The liability incurred on this constructioncontract was $2,173,905 and $0 at December 31, 2006 and 2005, respectively.

Ethanol Marketing Agreement — TheCompany has an agreement with Ethanol Products, LLC, for the sale, marketing,billing and receipt of payment and other administrative services for allethanol produced by the plant. The agreement expires on July 5, 2007, and isautomatically renewed for successive five-year terms unless terminated threemonths prior to expiration.  The Companyhas sales commitments of approximately 24 million gallons over the next twelvemonths.

Management Agreement — OnApril 20, 2005, the Company renewed its agreement with Broin Management,LLC for the management and operation of the plant. The original agreement wasexecuted on November 2, 2000 and remained in effect until July 1,2005. The term of the new management agreement, as amended, continues throughJune 30, 2015.  In exchange for these services, Broin Managementreceives an annual fee of $450,000, payable in equal monthly installments, plusan incentive bonus based on a percentage of net income, payable quarterly. Theannual fee is adjusted each year on March 1st for changes in the consumerprice index. The fees and bonus paid to Broin Management include the salary andbenefits of the general manager and technical manager and certain otherservices related to operation of the plant.

F-16

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# **NORTHERNGROWERS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

Technology and Patent Rights License Agreement- On October 25, 2005, the Company entered into a Technology and PatentRights License Agreement with Broin and Associates, Inc. Under thisagreement, Broin and Associates granted the Company a non-exclusive license touse certain technology and patents owned, developed, or obtained by Broin andAssociates relating to the ethanol and related product production processes.The Company is required to pay an annual licensing fee for the right to usesuch technology and patents. The term of this agreement continues untilJune 30, 2015.

Risk Management Agreement - DuringOctober 2006, the Company renewed its agreement with Broin Management, LLC forcorn and natural gas price risk management for the plant. The originalagreement was executed on August 1, 2003 and remains in effect until January 1,2007, the effective date of the new agreement. The term of the new riskmanagement agreement continues through December 31, 2011 and will beautomatically extended for an additional five (5) year term unless either partygives written notice ninety (90) days prior to expiration.  In exchangefor services relating to hedging and price risk management for corn and naturalgas for the plant, Broin Management receives an annual fee of $55,920, payablein equal quarterly installments, subject to modification in the case of plantexpansions or increases in corn usage.

Distillers GrainsMarketing Agreement —****The Companyhas an agreement with Dakota Gold Marketing, a related party through ownershipby entities related to the minority member, to provide marketing and administrativeservices for the sale of distillers grains. The agreement commenced on March 8,2002 and has a term of five years, renewing for five-year terms unlessterminated by either party with 90 days notice prior to expiration.  The agreement provides for an agencyrelationship in that Dakota Gold Marketing does not take title to thedistillers grains but acts as a broker on behalf of the Company.

Revenues and expensesrelated to agreements with related parties for the years ended December 31,2006, 2005 and 2004 are as follows:

|                                       | ** ** | **2006**      | ** **      | **2005**  | ** ** | **2004**   | ** ** |
|---------------------------------------|------------|---------------|-----------------|-----------|------------|------------|------------|
|                                  | ** ** | ** **    |            |      |       |       |       |
| Ethanol gross revenues                | ** ** | **$**         | **105,702,927** |      | $          | 72,633,304 |       | $ | 68,501,969 |   |
| Management fees expense               | ** ** | **3,440,001** |            | 1,663,261 |       | 995,458    |       |
| Licensing fees expense                | ** ** | **82,739**    |            | —    |       | —     |       |
| Marketing fees expense - all products | ** ** | **659,874**   |            | 619,527   |       | 691,832    |       |
|                                       |            |               |                 |           |            |            |            |  |  |  |

 

Agreements withunrelated parties are as follows:

Property Lease — TheCompany has a ninety-nine-year property lease (an operating lease) with BigStone-Grant Industrial Development and Transportation, LLC. Rent was $2,400annually for each of the first five years beginning in 2001. Beginning on May1, 2006, and every five years thereafter, rent is increased 5% over theimmediately preceding five-year period.

Steam — The Companyhas an agreement with the co-owners of the Big Stone Plant “Big Stone Plant”;Otter Tail Corporation, Montana-Dakota Utilities Co. and Northwestern PublicService, for steam in a specified amount for use in its ethanol manufacturingprocess at a base rate, adjusted annually for changes in the cost of energy.The agreement commenced on June 1, 2002 and has a term of ten years, renewablefor two five-year periods, after which the agreement is renewable from year toyear. Either party may terminate the agreement by providing notice one yearprior to a renewal or expiration date. Please see Note 12 — Cost ofRevenues — Settlement Credit, for further details on the steam agreement withthe Big Stone Plant.

Expenses relatedto the property lease and steam agreements for the years endedDecember 31, 2006, 2005 and 2004 were $3,052,843, $2,361,367 and$3,378,906, respectively.

F-17

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# **NORTHERNGROWERS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

Minimum payments related to the above agreements are summarized in thefollowing table:
| ** **                               | ** ** | ** **     | ** ** | ** **     | ** ** | **Unconditional** | ** ** | ** ** | ** ** |
|------------------------------------------|------------|----------------|------------|----------------|------------|-------------------|------------|------------|------------|
| ** **                               | ** ** | **Lease**      | ** ** | **Management** | ** ** | **Purchase**      | ** ** | ** ** | ** ** |
| **Years Ending  December 31,** | ** ** | **Agreements** | ** ** | **Agreements** | ** ** | **Agreements**    | ** ** | **Total**  | ** ** |
|                                     |       |           |       |           |       |              |       |       |       |
| 2007                                     |       | $              | 2,520      |           | $          | 516,120           |       | $          | 217,080    |   | $ | 735,720 |   |
| 2008                                     |       | 2,520          |       | 516,120        |       | 217,080           |       | 735,720    |       |
| 2009                                     |       | 2,520          |       | 516,120        |       | 217,080           |       | 735,720    |       |
| 2010                                     |       | 2,520          |       | 516,120        |       | 217,080           |       | 735,720    |       |
| 2011                                     |       | 2,646          |       | 516,120        |       | 217,080           |       | 735,846    |       |
| 2012-2100                                |       | 369,469        |       | 1,610,700      |       | 90,450            |       | 2,070,619  |       |
|                                     |       |           |       |           |       |              |       |       |       |
|                                     |       | $              | 382,195    |           | $          | 4,191,300         |       | $          | 1,175,850  |   | $ | 5,749,345 |   |

 

Corn Delivery— On August 9, 2005, Northern Lights agreed to release Northern Growersand, accordingly, all of its members from delivering corn to the plant startingon January 1, 2006.  Prior to January 1, 2006, Northern Growers’members were obligated to deliver corn to the plant unless the plant releasedthe member from the member’s corn delivery obligation.  EffectiveJanuary 1, 2006, however, Northern Growers’ members are no longerobligated to deliver corn to the plant. Instead, the plant purchases all of itscorn from local corn producers and the open market.  In addition, NorthernLights agreed to honor all member forward contracts for 2006 delivery if thecontract was written by September 15, 2005.  Purchases of corn from corn deliveryagreements and cash contracts from the Northern Growers’ members totaledapproximately $26,346,000, $22,016,000 and $33,300,000 for the years endingDecember 31, 2006, 2005 and 2004, respectively, of which $1,505,428 and$1,810,245 was recorded as a liability at December 31, 2006 and 2005,respectively.

Incentive Revenue— The Company received an incentive payment from the United States Departmentof Agriculture (USDA) for the use of corn to produce ethanol. The program endedJune 30, 2006.  In accordance with theterms of this arrangement, revenue is recorded based on incremental productionof ethanol compared to the prior year. The USDA has set the annual maximum notto exceed $7,500,000 for each eligible producer. The incentive is calculated onthe USDA fiscal year of October 1 to September 30. Revenue of $31,385, $26,835and $1,064,644 has been earned for the USDA program years ended September 30,2006, 2005 and 2004, respectively. Incentive revenue of $8,551, $48,681 and$932,477 was recorded for the years ended December 31, 2006, 2005 and 2004,respectively, for this program.

The Company alsoreceives an incentive payment from the State of South Dakota to produceethanol. In accordance with the terms of this arrangement, revenue is recordedbased on ethanol sold. The State of South Dakota has set a maximum of up to$1,000,000 per year for this program per qualifying producer. The Company hasearned $500,000, $776,333 and $705,404 for the program years ended June 30,2007, 2006 and 2005, respectively. Incentive revenue of $776,333, $705,404 and$666,667 was recorded for the years ended December 31, 2006, 2005 and 2004,respectively, for this program.

Legal Proceedings— The Company is involved in various legal actions arising in the normal courseof business. Management is of the opinion that their outcome will not have asignificant effect on the Company’s consolidated financial statements.

Capital Unit Trading- On March 8, 2004, Northern Growers’members and non-members began trading Northern Growers capital units on analternative trading system operated by Alerus Securities Corporation of WestFargo, North Dakota.

F-18

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# **NORTHERNGROWERS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

EnvironmentalContingency — In January 2003, the Environmental ProtectionAgency (EPA) issued formal information requests to, among others, plantsdesigned, constructed, and/or managed by Broin and Associates and BroinManagement. By virtue of the nature and timing of these requests, the Company’splant became subject to these requests. The requests required that the subjectplants provide the EPA with certain data regarding emissions, presumably todetermine whether the applicable plants were in compliance with the Clean AirAct. After this information was provided to the EPA, Broin and Associates, onbehalf of the Company and the subject plants managed by Broin Management,initiated discussions with the EPA regarding the application and use of testingmethods for quantifying certain types of emissions emanating from these plants.

To date, no legalproceeding is pending with or threatened by the EPA, nor has Broin andAssociates resolved with the EPA the application and use of the proper testingmethod for quantifying emissions. If a proceeding were initiated or settlementreached with the EPA, finesand/or other penalties against the Company could result, the nature and scopeof which is uncertain. While there is a reasonable possibility of fines and/orother penalties in the event of any proceeding or settlement, until the EPA andBroin and Associates resolve what the proper testing method will be formeasuring emissions, the Company is unable to estimate the scope and magnitudeof any possible fine or other penalty. Accordingly, the Company has not accruedany amount to its consolidated statement of operations relating to anypotential claim.

**NOTE 7 -       DISTRIBUTIONS**

During November2004, Northern Lights approved a $3,000,000 distribution, which it paid onNovember 12, 2004. Northern Growers received $2,314,800 and the minority memberreceived $685,200. In conjunction with this cash distribution, Northern Growerspaid a distribution to its members of $2,214,975.

DuringJanuary 2005, Northern Lights approved a $5,000,000 distribution, which itpaid on February 1, 2005. Northern Growers received $3,858,000 and theminority member received $1,142,000. In conjunction with this cashdistribution, on February 7, 2005, Northern Growers paid a distribution of$3,778,051 to its members of record as of December 31, 2004.

DuringJuly 2005, Northern Lights approved an $8,000,000 distribution, which itpaid on July 28, 2005. Northern Growers received $6,172,800 and theminority member received $1,827,200. In conjunction with this cashdistribution, on July 29, 2005, Northern Growers paid a distribution of$5,972,839 to its members of record as of April 30, 2005.

DuringOctober 2005, Northern Lights approved a $3,200,000 distribution, which itpaid on October 28, 2005. Northern Growers received $2,469,120 and theminority member received $730,880. In conjunction with this cash distribution,on October 31, 2005 Northern Growers paid a distribution of $2,469,064 toits members of record as of August 31, 2005.

DuringJanuary 2006, Northern Lights approved a $4,162,763 distribution, which itpaid on January 24, 2006. Northern Growers received $3,211,988 and the minoritymember received $950,775. In conjunction with this cash distribution, onJanuary 30, 2006, Northern Growers paid a distribution of $3,212,093 to itsmembers of record as of December 31, 2005. The above distributions arerecorded as a liability as of December 31, 2005.

DuringApril 2006, Northern Lights approved a $3,675,448 distribution, which itpaid on May 1, 2006. Northern Growers received $2,835,976 and the minoritymember received $839,472. In conjunction with this cash distribution, on May 8,2006, Northern Growers paid a distribution of $2,760,998 to its members ofrecord as of March 31, 2006.

F-19

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**NORTHERN GROWERS, LLC**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

During July 2006,Northern Lights approved a $10,899,284 distribution, which it paid on August 2,2006.  Northern Growers received $8,409,888 and the minority memberreceived $2,489,396.  In conjunction with this cash distribution, onAugust 7, 2006, Northern Growers paid a distribution of $8,359,696 to itsmembers of record as of June 30, 2006.

During October2006, Northern Lights approved an $11,000,000 distribution, which it paid onOctober 30, 2006.  Northern Growers received $8,487,600 and the minoritymember received $2,512,400.  In conjunction with this cash distribution,on November 6, 2006, Northern Growers paid a distribution of $8,337,419 to itsmembers of record as of September 30, 2006.

During January2007, Northern Lights approved an $11,000,000 distribution, which it paid onJanuary 26, 2007.  Northern Growers received $8,487,600 and the minoritymember received $2,512,400.  In conjunction with this cash distribution,on January 29, 2007, Northern Growers retained $1,699,904 by a super majorityvote of the Board of Managers, and paid a distribution of $6,787,696 to itsmembers of record as of December 31, 2006.  The above distributions arerecorded as a liability as of December 31, 2006.

**NOTE 8 -       CAPITAL UNITS**

On June 20,2005, Northern Growers approved a four-for-one (4-for-1) capital unit split ofits Class A capital units, effective for September 1, 2005. Under theterms of the Class A capital units’ split, members of record as ofSeptember 1, 2005 received four capital units for each one capital unitheld in Northern Growers.

On June 2, 2006,Northern Growers approved a two-for-one (2-for-1) capital unit split of itsClass A capital units, effective for July 1, 2006.  Under the terms of theClass A capital units’ split, members of record as of July 1, 2006 received twocapital units for each one capital unit held in Northern Growers.

Prior periodfinancial statements have been restated to reflect the capital unit splitsstated above.

**NOTE 9-       INCOME TAXES**

As of December 31, 2006 and 2005, the Company’s bookbasis of assets exceeded their tax basis by approximately $30,100,000 and$22,900,000, respectively. There were no significant differences between thebook basis and tax basis of liabilities as of December 31, 2006 or 2005.

**NOTE 10 -     401(K) PLAN**

On February 1,2003, the Company set up a 401(k) plan for substantially all employees who workmore than 1,000 hours per year. Employees can make voluntary contributions upto federally designated limits. The Company matches employee voluntarycontributions at a 50% level up to an effective maximum of 2% of gross employeepay. Eligible employees are always fully vested in their account balancesresulting from employee voluntary contributions. The Company 401(k) expense forthe years ended December 31, 2006, 2005 and 2004 was $33,646, $25,192 and$21,762, respectively.

F-20

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**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 11 -     QUARTERLY FINANCIAL DATA (UNAUDITED)**

Summary quarterly resultsare as follows:
| ** **                                     | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                                     | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
|                                           |       |        |       |        |       |        |       |        |       |
| Year Ended  December 31, 2006:                 |       |        |       |        |       |        |       |        |       |
|                                           |       |        |       |        |       |        |       |        |       |
| Total revenues                                 |       | $           | 25,944,116 |        | $          | 31,839,903  |       | $           | 34,896,320 |   | $ | 30,156,780 |   |
| Gross profit                                   |       | 8,663,189   |       | 15,741,041  |       | 20,163,657  |       | 15,537,856  |       |
| Operating income  (loss)                       |       | 7,548,135   |       | 14,182,345  |       | 18,347,680  |       | 13,662,600  |       |
| Income (loss)  before Minority Interest        |       | 7,306,106   |       | 13,951,973  |       | 18,097,633  |       | 13,479,920  |       |
| Minority  interest in subsidiary (income) loss |       | (1,678,944  | )          | (3,196,560  | )          | (4,137,618  | )          | (3,119,162  | )          |
| Net income  (loss)                             |       | 5,627,162   |       | 10,755,413  |       | 13,960,015  |       | 10,360,758  |       |
| Basic earnings  (loss) per unit                |       | 0.111       |       | 0.212       |       | 0.276       |       | 0.205       |       |
|                                           |       |        |       |        |       |        |       |        |       |
| Year Ended  December 31, 2005:                 |       |        |       |        |       |        |       |        |       |
|                                           |       |        |       |        |       |        |       |        |       |
| Total revenues                                 |       | $           | 22,264,409 |        | $          | 20,151,343  |       | $           | 22,174,095 |   | $ | 25,102,861 |   |
| Gross profit                                   |       | 6,286,254   |       | 3,714,285   |       | 6,321,903   |       | 9,817,510   |       |
| Operating income  (loss)                       |       | 5,374,964   |       | 2,913,306   |       | 5,359,768   |       | 8,578,737   |       |
| Income (loss)  before Minority Interest        |       | 5,081,681   |       | 2,611,957   |       | 5,036,734   |       | 8,275,803   |       |
| Minority  interest in subsidiary (income) loss |       | (1,170,325  | )          | (614,764    | )          | (1,161,824  | )          | (1,901,550  | )          |
| Net income  (loss)                             |       | 3,911,356   |       | 1,997,193   |       | 3,874,910   |       | 6,374,253   |       |
| Basic earnings  (loss) per unit                |       | 0.077       |       | 0.039       |       | 0.077       |       | 0.126       |       |
|                                           |       |        |       |        |       |        |       |        |       |
| Year Ended  December 31, 2004:                 |       |        |       |        |       |        |       |        |       |
|                                           |       |        |       |        |       |        |       |        |       |
| Total revenues                                 |       | $           | 21,707,883 |        | $          | 20,958,695  |       | $           | 22,296,905 |   | $ | 21,624,102 |   |
| Gross profit                                   |       | 5,942,562   |       | (1,922,844  | )          | 2,327,681   |       | 8,960,303   |       |
| Operating income  (loss)                       |       | 5,084,220   |       | (2,344,298  | )          | 1,669,817   |       | 7,913,726   |       |
| Income (loss)  before Minority Interest        |       | 4,711,367   |       | (2,700,009  | )          | 1,307,893   |       | 7,580,106   |       |
| Minority  interest in subsidiary (income) loss |       | (1,092,583  | )          | 607,565     |       | (305,533    | )          | (1,737,475  | )          |
| Net income  (loss)                             |       | 3,618,784   |       | (2,092,444  | )          | 1,002,360   |       | 5,842,631   |       |
| Basic earnings  (loss) per unit                |       | 0.071       |       | (0.041      | )          | 0.020       |       | 0.115       |       |
|                                           |       |        |       |        |       |        |       |        |       |
|                                           |       |        |       |        |       |        |       |        |       |

 

The above quarterlyfinancial data is unaudited, but in teh opinion of management, all adjustmentsnecessary for a fair presentation of the selected data for these interimperiods presented have been included. Basic earnings or loss per unit arepresented on the 50,628,000 unites currently issued and outstanding.

**Note 12 -     COSTOF REVENUES — SETTLEMENT CREDIT**

In November 2004, theCompany recieved a credit from Big Stone Plant for approximately $1,450,000.Big Stone Plant is located adjacent to the plant and supplies stream to theplant for production process. This credit was issued after an informal disputebetween the Company and Big Stone Plant regarding the report volume of steam suppliedfrom Big Stone Plant to the plant. In March 2003, management at the plantquestioned Big Stone Plant about the reported volume of steam supplied to theplant from Big Stone Plant. Management believed the reported volume of steamsupplied to the plant was excessive, compared to the volume of steam requiredfor the

F-21

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**NORTHERN GROWERS, LLC**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

production process. Afterinitial testing and analysis, Big Stone Plant concluded the reported volume ofsteam was accurate. After further testing and analysis in 2004, however, BigStone Plant determined that the reported volume of steam was erroncous due toan error caused by the miscalibration of a metering instrument. As a result ofthis error, Big Stone Plant overcharged the Company for the use of steam in2003 and 2004. In November 2004, in an effort to resolve the dispute, Big StonePlant notifed the Company that a settlement credit would be issued, which theCompany agreed to accept. At December 31, 2005, there was no balanceoutstanding as the credit had been depleted in full.

F-22

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