Table of Contents

 

 

** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 
| **x**                                                                                                                                                                                                                                                        | **Quarterly  report under Section 13 or 15(d) of the Securities Exchange Act of  1934.** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                         |
| **For the  quarterly period ended June 30, 2008**                                                                                                                                                                                                       |
|                                                                                                                                                                                                                                                         |
| **OR**                                                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                                                         |
| **o**                                                                                                                                                                                                                                                        | **Transition  report under Section 13 or 15(d) of the Exchange Act.**                    |
|                                                                                                                                                                                                                                                         |
| **For the  transition period from                     to                   ** |
|                                                                                                                                                                                                                                                         |
| **Commission file number 000-50733**                                                                                                                                                                                                                         |

** **

**UNITEDWISCONSIN GRAIN PRODUCERS, LLC**

(Exact name of registrant as specified in itscharter)

 

| **Wisconsin**                                                       | ** ** | **39-2032455**                           |
|---------------------------------------------------------------------|------------|------------------------------------------|
| **(State or other jurisdiction of  incorporation or organization)** | ** ** | **(I.R.S. Employer Identification No.)** |
| ** **                                                          | ** ** | ** **                               |
| **W1231  Tessmann Drive, Friesland, Wisconsin**                     | ** ** | **53935-0247**                           |
| (Address of principal executive offices)                            |       | (Zip Code)                               |

 

**(920) 348-5016**

(Registrant’s telephone number)

** **

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.
|   | x   Yes          o  No |
|--------|------------------------------------------------------------------------------------|

 

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

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).
|   | o  Yes          x  No |
|--------|-----------------------------------------------------------------------------------|

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date:

 

Asof August 8, 2008, there were 28,475 membership units outstanding.

 

 

 

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**INDEX**

 
| ** **                                                                                              | **Page No.** |
|---------------------------------------------------------------------------------------------------------|-------------------|
|                                                                                                    |              |
| **PART I.     FINANCIAL  INFORMATION**                                    | **3**             |
| ** **                                                                                              | ** **        |
| **Item 1. Financial Statements**                                                                        | **3**             |
| **Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations** | **14**            |
| **Item 3. Quantitative and Qualitative Disclosures About  Market Risk**                                 | **24**            |
| **Item 4. Controls and Procedures**                                                                     | **25**            |
| ** **                                                                                              | ** **        |
| **PART II.  OTHER INFORMATION**                                                                    | **25**            |
| ** **                                                                                              | ** **        |
| **Item  1. Legal Proceedings**                                                                          | **25**            |
| **Item 1A. Risk Factors**                                                                               | **25**            |
| **Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds**                                | **26**            |
| **Item 3. Defaults Upon Senior Securities**                                                             | **26**            |
| **Item 4. Submission of Matters to a Vote of Security  Holders**                                        | **26**            |
| **Item  5. Other Information**                                                                          | **26**            |
| **Item 6. Exhibits**                                                                                    | **27**            |
| ** **                                                                                              | ** **        |
| **SIGNATURES**                                                                                          | **27**            |

 

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**PART I.     FINANCIALINFORMATION**

 

**Item 1.  Financial Statements.**

** **

**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

 

Condensed Balance Sheets

 
| ** **                                                                                        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                        | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| ** **                                                                                        | ** ** | **(Unaudited)**   | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                        |       |              |       |                  |       |
| **Current Assets**                                                                                |       |              |       |                  |       |
| Cash and cash equivalents                                                                         |       | $                 | 14,108,075 |                  | $          | 24,759,614 |   |
| Restricted cash                                                                                   |       | 1,763,825         |       | 248,383               |       |
| Derivative instruments                                                                            |       | 2,889,863         |       | 5,189                 |       |
| Accounts receivable, net of allowance for  doubtful accounts of $94,000 and $69,000, respectively |       | 5,372,241         |       | 5,486,721             |       |
| Inventory                                                                                         |       | 5,739,305         |       | 2,785,264             |       |
| Prepaid expenses and other current assets                                                         |       | 240,712           |       | 634,869               |       |
| Total current assets                                                                              |       | 30,114,021        |       | 33,920,040            |       |
|                                                                                              |       |              |       |                  |       |
| **Property, Plant and Equipment**                                                                 |       |              |       |                  |       |
| Land and land improvements                                                                        |       | 5,864,889         |       | 5,864,889             |       |
| Office equipment                                                                                  |       | 613,976           |       | 567,547               |       |
| Buildings                                                                                         |       | 2,197,433         |       | 2,192,293             |       |
| Plant and process equipment                                                                       |       | 54,575,170        |       | 52,812,431            |       |
|                                                                                              |       | 63,251,468        |       | 61,437,160            |       |
| Less accumulated depreciation                                                                     |       | 15,481,266        |       | 12,718,946            |       |
|                                                                                              |       | 47,770,202        |       | 48,718,214            |       |
| Construction in process                                                                           |       | 5,338,749         |       | 2,906,876             |       |
| Net property, plant and equipment                                                                 |       | 53,108,951        |       | 51,625,090            |       |
|                                                                                              |       |              |       |                  |       |
| **Other Assets**                                                                                  |       |              |       |                  |       |
| Investment                                                                                        |       | 113,986           |       | 993,065               |       |
| Total other assets                                                                                |       | 113,986           |       | 993,065               |       |
|                                                                                              |       |              |       |                  |       |
| **Total Assets**                                                                                  |       | $                 | 83,336,958 |                  | $          | 86,538,195 |   |

 

Notes to Condensed Unaudited Financial Statements are an integral partof this Statement.

 

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**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

 

Condensed Balance Sheets

 
| ** **                                                                             | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                             | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| ** **                                                                             | ** ** | **(Unaudited)**   | ** ** | ** **            | ** ** |
| **LIABILITIES AND MEMBERS’ EQUITY**                                               |       |              |       |                  |       |
| **Current Liabilities**                                                                |       |              |       |                  |       |
| Current maturities of long-term debt                                                   |       | $                 | —     |                  | $          | 1,258,252 |   |
| Accounts payable                                                                       |       | 3,582,131         |       | 3,242,911             |       |
| Accounts payable - related party                                                       |       | 40,750            |       | 15,878                |       |
| Accrued liabilities                                                                    |       | 1,077,026         |       | 794,853               |       |
| Total current liabilities                                                              |       | 4,699,907         |       | 5,311,894             |       |
|                                                                                   |       |              |       |                  |       |
| **Long-Term Debt, less current maturities**                                            |       | —            |       | 13,097,887            |       |
|                                                                                   |       |              |       |                  |       |
| **Commitments and Contingencies**                                                      |       |              |       |                  |       |
|                                                                                   |       |              |       |                  |       |
| **Members’ Equity,**28,475  and 28,710 units issued and outstanding, respectively |       | 78,637,051        |       | 68,128,414            |       |
|                                                                                   |       |              |       |                  |       |
| **Total Liabilities and Members’ Equity**                                         |       | $                 | 83,336,958 |                  | $          | 86,538,195 |   |

 

Notes to Condensed Unaudited Financial Statements are an integral partof this Statement.

 

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**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

 

Condensed Statements of Operations

(Unaudited)

 
| ** **                                                                               | ** ** | **Quarter Ended** | ** ** | **Quarter Ended** | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                               | ** ** | **June 30,**      | ** ** | **June 30,**      | ** ** |
| ** **                                                                               | ** ** | **2008**               | ** ** | **2007**               | ** ** |
|                                                                                     |       |                   |       |                   |       |
| **Revenues,**including  $32,674 and $0, respectively from related parties                |       | $                      | 36,188,592 |                   | $          | 28,187,346 |   |
|                                                                                     |       |                   |       |                   |       |
| **Cost of Goods Sold,**including  $704,003 and $370,594, respectively to related parties |       | 23,633,515             |       | 21,525,312             |       |
|                                                                                     |       |                   |       |                   |       |
| **Gross Profit**                                                                         |       | 12,555,077             |       | 6,662,034              |       |
|                                                                                     |       |                   |       |                   |       |
| **Operating Expenses**                                                                   |       | 951,163                |       | 886,536                |       |
|                                                                                     |       |                   |       |                   |       |
| **Operating Income**                                                                     |       | 11,603,914             |       | 5,775,498              |       |
|                                                                                     |       |                   |       |                   |       |
| **Other Income (Expense)**                                                               |       |                   |       |                   |       |
| Interest income                                                                          |       | 107,281                |       | 248,004                |       |
| Interest expense                                                                         |       | (61,846                | )          | (255,185               | )          |
| Equity in net loss of investment                                                         |       | (866,000               | )          | (113,654               | )          |
| Miscellaneous income, net                                                                |       | 85,541                 |       | 40,054                 |       |
| Total other expense, net                                                                 |       | (735,024               | )          | (80,781                | )          |
|                                                                                     |       |                   |       |                   |       |
| **Net Income**                                                                           |       | $                      | 10,868,890 |                   | $          | 5,694,717 |   |
|                                                                                     |       |                   |       |                   |       |
| **Weighted Average Units Outstanding - Basic  and Diluted**                              |       | 28,498                 |       | 28,780                 |       |
|                                                                                     |       |                   |       |                   |       |
| **Net Income Per Unit - Basic and Diluted**                                              |       | $                      | 381.39     |                   | $          | 197.87 |   |
|                                                                                     |       |                   |       |                   |       |
| **Distribution Per Unit - Basic and Diluted**                                            |       | $                      | —     |                   | $          | — |   |

 

Notes to Condensed Unaudited Financial Statements are an integral partof this Statement.

 

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**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

 

Condensed Statements of Operations

(Unaudited)

 
| ** **                                                                                    | ** ** | **Six Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                                                                                    | ** ** | **June 30,**              | ** ** | **June 30,**              | ** ** |
| ** **                                                                                    | ** ** | **2008**                       | ** ** | **2007**                       | ** ** |
|                                                                                          |       |                           |       |                           |       |
| **Revenues,**including  $62,013 and $132, respectively from related parties                   |       | $                              | 70,425,979 |                           | $          | 57,189,138 |   |
|                                                                                          |       |                           |       |                           |       |
| **Cost of Goods Sold,**  including $1,159,690 and $1,175,202, respectively to related parties |       | 49,424,481                     |       | 42,601,260                     |       |
|                                                                                          |       |                           |       |                           |       |
| **Gross Profit**                                                                              |       | 21,001,498                     |       | 14,587,878                     |       |
|                                                                                          |       |                           |       |                           |       |
| **Operating Expenses**                                                                        |       | 1,904,566                      |       | 1,652,154                      |       |
|                                                                                          |       |                           |       |                           |       |
| **Operating Income**                                                                          |       | 19,096,932                     |       | 12,935,724                     |       |
|                                                                                          |       |                           |       |                           |       |
| **Other Income (Expense)**                                                                    |       |                           |       |                           |       |
| Interest income                                                                               |       | 376,392                        |       | 502,921                        |       |
| Interest expense                                                                              |       | (330,515                       | )          | (541,896                       | )          |
| Equity in net loss of investment                                                              |       | (879,079                       | )          | (113,654                       | )          |
| Miscellaneous income                                                                          |       | 97,707                         |       | 54,491                         |       |
| Total other expense, net                                                                      |       | (735,495                       | )          | (98,138                        | )          |
|                                                                                          |       |                           |       |                           |       |
| **Net Income**                                                                                |       | $                              | 18,361,437 |                           | $          | 12,837,586 |   |
|                                                                                          |       |                           |       |                           |       |
| **Weighted Average Units Outstanding - Basic  and Diluted**                                   |       | 28,566                         |       | 28,780                         |       |
|                                                                                          |       |                           |       |                           |       |
| **Net Income Per Unit - Basic and Diluted**                                                   |       | $                              | 642.77     |                           | $          | 446.06 |   |
|                                                                                          |       |                           |       |                           |       |
| **Distributions Per Unit - Basic and Diluted**                                                |       | $                              | 250.00     |                           | $          | 500.00 |   |

 

Notes to Condensed Unaudited Financial Statements are an integral partof this Statement.

 

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**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

** **

Condensed Statements of Cash Flows

(Unaudited)

 
| ** **                                                               | ** ** | **Six Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                                                               | ** ** | **June 30,**              | ** ** | **June 30,**              | ** ** |
| ** **                                                               | ** ** | **2008**                       | ** ** | **2007**                       | ** ** |
|                                                                     |       |                           |       |                           |       |
| **Cash Flows from Operating Activities**                                 |       |                           |       |                           |       |
| Net Income                                                               |       | $                              | 18,361,437 |                           | $          | 12,837,586 |   |
| Adjustments to reconcile net income to net  cash provided by operations: |       |                           |       |                           |       |
| Depreciation                                                             |       | 2,762,320                      |       | 2,419,692                      |       |
| Allowance for doubtful accounts receivable                               |       | 25,624                         |       | —                         |       |
| Change in fair value of derivative  instruments                          |       | (11,924,647                    | )          | 1,691,892                      |       |
| Equity in net loss of investment                                         |       | 879,079                        |       | 113,654                        |       |
| Changes in operating assets and  liabilities:                            |       |                           |       |                           |       |
| Restricted cash                                                          |       | (1,515,442                     | )          | (435,738                       | )          |
| Derivative instruments                                                   |       | 9,039,973                      |       | (941,080                       | )          |
| Accounts receivable                                                      |       | 88,856                         |       | 1,132,470                      |       |
| Inventory                                                                |       | (2,954,041                     | )          | (534,138                       | )          |
| Prepaid expenses and other current assets                                |       | 394,157                        |       | 47,128                         |       |
| Accounts payable                                                         |       | 643,433                        |       | (263,678                       | )          |
| Accrued liabilities                                                      |       | 282,173                        |       | (129,281                       | )          |
| Net cash provided by operating activities                                |       | 16,082,922                     |       | 15,938,507                     |       |
|                                                                     |       |                           |       |                           |       |
| **Cash Flows from Investing Activities**                                 |       |                           |       |                           |       |
| Capital expenditures                                                     |       | (1,534,968                     | )          | (113,641                       | )          |
| Payments for construction in process                                     |       | (2,431,873                     | )          | (4,018,349                     | )          |
| Purchase of investments                                                  |       | —                         |       | (1,055,000                     | )          |
| Net cash used in investing activities                                    |       | (3,966,840                     | )          | (5,186,990                     | )          |
|                                                                     |       |                           |       |                           |       |
| **Cash Flows from Financing Activities**                                 |       |                           |       |                           |       |
| Payments on long term debt                                               |       | (14,356,139                    | )          | (572,932                       | )          |
| Repurchase of membership units                                           |       | (677,800                       | )          | —                         |       |
| Payment of member distribution                                           |       | (7,175,000                     | )          | (14,390,000                    | )          |
| Net cash used in financing activities                                    |       | (22,208,939                    | )          | (14,962,932                    | )          |
|                                                                     |       |                           |       |                           |       |
| **Net Decrease in Cash and Cash Equivalents**                            |       | (10,651,539                    | )          | (4,211,415                     | )          |
|                                                                     |       |                           |       |                           |       |
| **Cash and Cash Equivalents– Beginning of  Period**                 |       | 24,759,614                     |       | 29,981,331                     |       |
|                                                                     |       |                           |       |                           |       |
| **Cash and Cash Equivalents– End of Period**                        |       | $                              | 14,108,075 |                           | $          | 25,769,916 |   |
|                                                                     |       |                           |       |                           |       |
| **Supplemental Cash Flow Information**                                   |       |                           |       |                           |       |
|                                                                     |       |                           |       |                           |       |
| Interest expensed                                                        |       | $                              | 330,515    |                           | $          | 545,547 |   |
| Interest capitalized                                                     |       | 12,634                         |       | 27,465                         |       |
| Total interest paid                                                      |       | $                              | 343,149    |                           | $          | 573,012 |   |
| ** **                                                               |       |                           |       |                           |       |   |   |
| **Noncash Financing Activities**                                         |       |                           |       |                           |       |   |   |
| Construction in process purchased by  accounts payable                   |       | $                              | 279,341    |                           | $          | — |   |

 

Notes to Condensed Unaudited Financial Statements are an integral partof this Statement.

 

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** **

**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

 

Notes to Condensed FinancialStatements (Unaudited)

 

June 30, 2008

 

**1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

The accompanyingcondensed balance sheet as of December 31, 2007 is derived from auditedfinancial statements. The unaudited interim condensed financial statements ofUnited Wisconsin Grain Producers, LLC (the “Company”) reflect all adjustmentsconsisting only of normal recurring adjustments that are, in the opinion ofmanagement, necessary for a fair presentation of financial position and resultsof operations and cash flows. The results for the three and six month periodsended June 30, 2008 are not necessarily indicative of the results that maybe expected for a full fiscal year. Certain information and note disclosuresnormally included in annual financial statements prepared in accordance withaccounting principles generally accepted in the United States of America (“GAAP”)are condensed or omitted pursuant to the rules and regulations of theSecurities and Exchange Commission (“SEC”), although the Company believes thatthe disclosures made are adequate to make the information not misleading. Thesecondensed financial statements should be read in conjunction with the Company’saudited financial statements and notes thereto included in its annual reportfor the year ended December 31, 2007 filed on Form 10-K with the SEC.

 

*Nature of Business*

 

United Wisconsin GrainProducers LLC (a Wisconsin limited liability company) is a 60 million gallonethanol plant located near the town of Friesland in the township of Randolph,Wisconsin. During 2007, the Company substantially completed Phase I of anexpansion project which increased the plant production capacity from theinitial nameplate production capacity of 40 million gallons per year to 60million gallons per year. The Company sells its production of ethanol anddistillers grains, a co-product of ethanol production, within the UnitedStates. The plant commenced operations in May of 2005.

 

*Accounting Estimates*

 

Management uses estimatesand assumptions in preparing these financial statements in accordance withgenerally accepted accounting principles. Those estimates and assumptionsaffect the reported amounts of assets and liabilities, the disclosure ofcontingent assets and liabilities, and the reported revenues and expenses. TheCompany uses estimates and assumptions in accounting for the followingsignificant matters, among others: allowances for doubtful accounts, usefullives of property, plant and equipment, estimated completion of construction inprocess, including capitalized interest, revenue recognition and cost of goodssold, including shipping costs, and long-lived asset impairments.  Actual results may differ from previouslyestimated amounts, and such differences may be material to our condensedfinancial statements. We periodically review estimates and assumptions, and theeffects of revisions are reflected in the period in which the revision is made.

 

*Revenue Recognition*

 

The Company generallysells ethanol and related products pursuant to marketing agreements. Revenuesare recognized when the customer takes title and assumes the risks and rewardsof ownership, prices are fixed or determinable, and collectibility isreasonably assured. The Company’s products are generally sold FOB shippingpoint.

 

In accordance with theCompany’s agreements for the marketing and sale of ethanol and relatedproducts, marketing fees and commissions due to the marketers are deducted fromthe gross sales price at the time payment is remitted to the Company. Thesefees and commissions, which totaled $479,495 and $160,820 for the six monthperiods ended  June 30, 2008 and2007, respectively, are recorded net of revenues as they do not provide anidentifiable benefit that is sufficiently separable from the sale of ethanoland related products. Shipping costs incurred by the Company in the sale ofethanol are not specifically identifiable and as a result, are estimated andrecorded based on the net selling price reported to the Company by themarketer. Shipping costs incurred by the Company in the sale of ethanol relatedproducts are included in cost of goods sold.

 

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**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

 

Notes to Condensed FinancialStatements (Unaudited)

 

June 30, 2008

 

*Derivative Instruments*

 

The Company accounts forderivatives in accordance with Statement of Financial Accounting Standards(SFAS) No. 133, “Accounting for Derivative Instruments and HedgingActivities”. SFAS No. 133 requires the recognition of derivatives in thebalance sheet and the measurement of these instruments at fair value.

 

In order for a derivativeto qualify as a hedge, specific criteria must be met and appropriatedocumentation maintained. Gains and losses from derivatives that do not qualifyas hedges, or are undesignated, must be recognized immediately in earnings. Ifthe derivative does qualify as a hedge, depending on the nature of the hedge,changes in the fair value of the derivative will be either offset against thechange in fair value of the hedged assets, liabilities, or firm commitmentsthrough earnings or recognized in other comprehensive income until the hedgeditem is recognized in earnings. Changes in the fair value of undesignatedderivatives are recorded in cost of goods sold.

 

Additionally, SFAS No. 133requires a company to evaluate its contracts to determine whether the contractsare derivatives. Certain contracts that literally meet the definition of aderivative may be exempted as “normal purchases or normal sales”. Normalpurchases and normal sales are contracts that provide for the purchase or saleof something other than a financial instrument or derivative instrument thatwill be delivered in quantities expected to be used or sold over a reasonableperiod in the normal course of business. Contracts that meet the requirementsof normal purchases or sales are documented as normal and exempted from theaccounting and reporting requirements of SFAS No. 133, and therefore, arenot marked to market in our financial statements.

 

In order to reduce therisk caused by market fluctuations, the Company hedges its anticipated cornpurchases and ethanol sales by entering into options and futures contracts.These contracts are used with the intention to fix the purchase price of ouranticipated requirements of corn in production activities and the sales priceof ethanol. The fair value of these contracts is based on quoted prices inactive exchange-traded or over-the-counter markets. The fair value of thederivatives is continually subject to change due to changing market conditions.The Company does not formally designate these instruments as hedges and,therefore, records in current earnings the changes in fair value of theunderlying derivative instrument. The Company records withdrawals and paymentsagainst the trade equity of derivative instruments as a reduction or increasein the value of the derivative instruments.

 

*Recently Issued AccountingPronouncements*

 

InMarch 2008, the FASB issued SFAS 161, *Disclosuresabout Derivative Instruments and Hedging Activities*, which requiresenhanced disclosures about how these instruments and activities affect theentity’s financial position, financial performance and cash flows. The standardrequires disclosure of the fair values of derivative instruments and theirgains and losses in a tabular format. It also provides more information aboutan entity’s liquidity by requiring disclosure of derivative features that arecredit risk-related. Finally, it requires cross-referencing within footnotes toenable financial statement users to locate important information aboutderivative instruments. SFAS 161 is effective for financial statements issuedfor fiscal years and interim periods beginning after November 15, 2008.Because SFAS 161 requires enhanced disclosures but does not modify theaccounting treatment of derivative 

 

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**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

 

Notes to Condensed FinancialStatements (Unaudited)

 

June 30, 2008

 

instrumentsand hedging activities, the Company believes the adoption of this standard willhave no effect on its financial position, results of operations or cash flows.

 

InMay 2008, the FASB issued SFAS No. 162, The Hierarchy of GenerallyAccepted Accounting Principles. This Statement identifies the sources ofaccounting principles and the framework for selecting the principles to be usedin the preparation of financial statements of nongovernmental entities that arepresented in conformity with generally accepted accounting principles in theUnited States. This Statement is effective 60 days following the SEC’s approvalof the Public Company Accounting Oversight Board amendments to AU Section 411,The Meaning of Present Fairly in Conformity With Generally Accepted AccountingPrinciples. The Company does not believe that implementation of this standardwill have a material effect on its consolidated financial position, results ofoperations or cash flows.

 

*Reclassifications*

 

The presentation ofcertain items in the condensed statement of operations for the three andsix months ended June 30, 2007 has been changed to conform to theclassifications used for the three and six months ended June 30, 2008.These reclassifications had no effect on net income as previously reported.

 

**2.INVENTORY**

 

Inventory consists of thefollowing:

 
| ** **      | ** ** | **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|-----------------|------------|-----------------------------|------------|---------------------------------|------------|
| Raw materials   |       | $                           | 2,985,837  |                            | $          | 545,467 |   |
| Supplies        |       | 582,403                     |       | 496,348                         |       |
| Work in process |       | 591,674                     |       | 412,772                         |       |
| Finished goods  |       | 1,579,391                   |       | 1,330,677                       |       |
| Total           |       | $                           | 5,739,305  |                            | $          | 2,785,264 |   |

 

**3.DERIVATIVE INSTRUMENTS**

 

The Company recorded anasset for derivative instruments related to corn and ethanol option and futurespositions of $2,889,863 and $5,189 at June 30, 2008 and December 31,2007, respectively. None of these open positions, at June 30, 2008 and December 31,2007 were designated as hedges. The Company recorded a combined realized andunrealized gain on corn hedging of $9,214,861 and a combined realized andunrealized loss on corn hedging of $16,000, for the quarters ended June 30,2008 and 2007, respectively.  The Companyrecorded a combined realized and unrealized gain on corn hedging of $11,924,647and a combined realized and unrealized loss on corn hedging of $706,000 for thesix months ended June 30, 2008 and 2007, respectively. Realized andunrealized gains and losses related to derivative contracts that are related tocorn purchases are included as a component of cost of goods sold. The Company recordeda combined realized and unrealized loss on ethanol hedging of approximately $0and $599,000 for the quarters ended June 30, 2008 and 2007, respectivelyand a combined realized and unrealized loss on ethanol hedging of approximately$40 and $985,000 for the six months ended June 30, 2008 and 2007,respectively. Realized and unrealized gains and losses related to derivativecontracts that are related to ethanol sales are included as a component ofrevenues.

 

The company is requiredto maintain cash balances at its broker related to derivative instrumentpositions. At June 30, 2008 and December 31, 2007, restricted cashtotaled $1,763,825 and $248,383, respectively, and is not included in cash andcash equivalents on the balance sheet or the statements of cash flows.

 

**4. FAIRVALUE MEASUREMENTS**

 

Effective January 1,2008, the Company adopted Statement of Financial Accounting Standard No. 157,“Fair Value Measurements” (SFAS 157), as it applies to the financialinstruments, and Statement of Financial Accounting Standard No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities – Including anamendment 

 

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**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

 

Notes to Condensed FinancialStatements (Unaudited)

 

June 30, 2008

 

of FASB Statement No. 115”(SFAS 159). SFAS 157 defines fair value, outlines a framework for measuringfair value, and details the required disclosures about fair value measurements.SFAS 159 permits companies to irrevocably choose to measure certain financialinstruments and other items at fair value. SFAS 159 also establishespresentation and disclosure requirements designed to facilitate comparisonbetween entities that choose different measurement attributes for similar typesof assets and liabilities.

 

Under SFAS 157, fairvalue is defined as the price that would be received to sell an asset or paidto transfer a liability in an orderly transaction between market participantsat the measurement date in the principal or most advantageous market. SFAS 157establishes a hierarchy in determining the fair value of an asset or liability.The fair value hierarchy has three levels of inputs, both observable andunobservable. SFAS 157 requires the utilization of the lowest possible level ofinput to determine fair value. Level 1 inputs include quoted market prices inan active market for identical assets or liabilities. Level 2 inputs are marketdata, other than Level 1, that are observable either directly or indirectly.Level 2 inputs include quoted market prices for similar assets or liabilities,quoted market prices in an inactive market, and other observable informationthat can be corroborated by market data. Level 3 inputs are unobservable andcorroborated by little or no market data.

 

In addition to thoseassets and liabilities which are required by authoritative accounting guidanceto be recorded at fair value in our balance sheet, we recorded an impairmentloss of $866,000 on our investment in the First Missouri Energy project to carrythis asset at fair value, as permitted by SFAS 159.  The company based this determination on theproposals to delay, modify, or repeal state and federal subsidies and programswhich would have an adverse effect on this project.  We elected not torecord any other assets or liabilities at fair value, as permitted by SFAS 159.No other events occurred during the second quarter 2008 which would requireadjustment to the recognized balances of assets or liabilities which arerecorded at fair value on a nonrecurring basis.

 

The following tableprovides information on those assets and liabilities measured at fair value ona recurring basis.

 
| ** **             | ** ** | **Carrying Amount**       | ** ** | ** **             | ** ** | ** **                                      | ** ** | ** **  | ** ** | ** **  | ** ** |
|------------------------|------------|--------------------------------|------------|------------------------|------------|-------------------------------------------------|------------|-------------|------------|-------------|------------|
| ** **             | ** ** | **In Balance Sheet** | ** ** | **Fair Value**    | ** ** | **Fair Value Measurement Using** | ** ** |
| ** **             | ** ** | **June 30, 2008**         | ** ** | **June 30, 2008** | ** ** | **Level 1**                                     | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Derivative Instruments |       | $                              | 2,889,863  |                   | $          | 2,889,863                                       |       | $           | 2,889,863  |        | $          | — |   | $ | — |   |
| Other Investments      |       | $                              | 113,986    |                   | $          | 113,986                                         |       | $           | —     |        | $          | — |   | $ | 113,986 |   |

 

The measurement ofderivatives at fair value reflects the contractual terms of the derivatives,including the period to maturity and uses observable market-based inputs anduses the market standard methodology of netting the discounted future fixedcash receipts and the discounted expected variable cash payments. The variablecash payments are based on an expectation of future interest rates derived fromobservable market interest rate curves. The fair value of the derivativeinstruments are based on quoted market prices in an active market.

 

The measurement of otherinvestments reflects our estimate of the probability of future cash flows fromthe First Missouri Energy project in the current state and federal regulatoryenvironment.

 

**5. BANKFINANCING**

 

On May 25, 2006, theCompany closed on a mortgage in the amount of $21,040,376, which included arevolving credit agreement, secured by substantially all of the Company’sassets, in the amount of $5,000,000, and a term credit agreement in the amountof $16,040,376 with Farmers & Merchants Union Bank to refinance theexisting debt with AgStar Financial Services, PCA. The term debt consisted of afive-year business note in the amount of $16,040,376 at a fixed interest rateof 7.4% and required monthly payments based on a ten-year amortizationbeginning July 1, 2006.  As of June 30,2008 and December 31, 2007, the Company had outstanding debt of $0 and$14,356,139, respectively, on the term debt and did not have any borrowings onthe revolving credit commitment.

 

OnJanuary 10, 2008 the Company voted to payoff the balance of the Company’sexisting long-term debt with Farmers & Merchants Union Bank. TheCompany retired the term debt in April 2008.

 

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**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

 

Notes to Condensed FinancialStatements (Unaudited)

 

June 30, 2008

 

**6.MEMBERS’ EQUITY**

 

As specified in theCompany’s operating agreement, the Company has one class of membership units.The Company is authorized to issue up to 28,000 membership units in addition tothe 1,280 seed capital units issued prior to the Company’s initial registeredoffering.

 

On June 11, 2007 theboard approved up to $1 million to redeem membership units offered for sale atthe market price over the next 12 months. As of June 30, 2008 the boardapproved unit redemptions of 305 units totaling $901,050 effective on variousdates from September 1, 2007 to June 1, 2008.  The 12 month period expired in June of2008 and the board has not approved any additional spending for the redemptionof membership units.

 

As of June 30, 2008and December 31, 2007 the Company had 28,475 and 28,710 membership unitsoutstanding, respectively.

 

**7.COMMITMENTS AND CONTINGENCIES**

 

*Corn and Natural Gas Contracts*

 

AtJune 30, 2008, the Company had forward corn purchase contracts totalingapproximately 8.7 million bushels for various delivery periods from July 2008to December 2009 of which approximately 40% are with members. The priceson these contracts range from $2.59 to $7.63 per bushel or have a basis levelestablished by the CBOT futures between $0 and $-0.35. At June 30, 2008,the Company had forward contracts to purchase approximately 158,900 millionBritish thermal units (MMBTU) of natural gas during the months July throughSeptember 2008 at an average price of approximately $12.36 per MMBTU.

 

*Plant Expansion*

 

As of June 30, 2008,the Company incurred $1.75 million for expansion of the storage, shipping, andreceiving in the grains area which is expected to cost $2.4 million in total.The Company also incurred costs of approximately $1.7 million as of June 30,2008 for a distillers grain cooling and conveying system which is expected tocost approximately $2 million in total. As of June 30, 2008, the Companyincurred costs of approximately $1.3 million for a dehydration, distillation,and evaporation system which is expected to cost approximately $18 million intotal. The Company also approved the addition of a cooling tower and aregenerative thermal oxidizer expected to total $4.4 million in costs andincurred costs of approximately $1.6 million as of June 30, 2008.

 

*Other Investments*

 

On February 12,2007, the board of directors approved up to a $10 million investment in FirstMissouri Energy, LLC. First Missouri Energy, LLC was formed with the intent toconstruct a 55 million gallon per year ethanol plant near Cape Girardeau,Missouri.  During April 2008, theCompany determined that the viability of this project in the near future was inquestion. The Company based this determination on the proposals to delay,modify, or repeal state and federal subsidies and programs which would have anadverse effect on this project. Accordingly, the Company has recorded animpairment loss of approximately $866,000 on this investment in the secondquarter of 2008. The Company believes the remaining asset, primarily land, isrecoverable. The board of First Missouri Energy is currently assessing itsoptions to further delay the development of the project.  As of June 30, 2008, the Company invested $1,155,000 in thisproject. The Company accounts for this investment using the equity method ofaccounting and recorded a loss on this investment of $866,000 and $879,079 forthe three and six months ended June 30, 2008, respectively and $113,654for both the three and six months ended June 30, 2007.

 

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**UNITED WISCONSIN GRAIN PRODUCERS, LLC**

 

Notes to Condensed FinancialStatements (Unaudited)

 

June 30, 2008

 

**8.  SUBSEQUENT EVENTS**

 

*MembershipDistribution*

 

On July 14, 2008,the board of directors approved a membership distribution of $200 permembership unit to members of record as of July 14, 2008 for a totaldistribution of approximately $5,695,000 to be paid on or around August 15,2008.

 

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**Item 2.    Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.**

** **

We prepared the followingdiscussion and analysis to help you better understand our financial condition,changes in our financial condition, and results of operations for thethree-month period and six-month period ended June 30, 2008 compared tothe same period of the prior fiscal year. This discussion should be read in conjunction with our annual report on Form 10-Kfor the fiscal year ended December 31, 2007, including the financialstatements and notes and the Management’s Discussion and Analysis containedwithin that report.

 

**DisclosureRegarding Forward-Looking Statements**

 

Thisreport contains historical information, as well as forward-looking statementsthat involve known and unknown risks and relate to future events, our futurefinancial performance, or our expected future operations and actions.  In some cases, you can identify forward-lookingstatements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,”“believe,” “estimate,” “future,” “intend,” “could,” “hope,” “predict,” “target,”“potential,” or “continue” or the negative of these terms or other similarexpressions.  These forward-lookingstatements are only our predictions based upon current information and involvenumerous assumptions, risks and uncertainties. Our actual results or actions may differ materially from theseforward-looking statements for many reasons, including the reasons described inthis report.  While it is impossible toidentify all such factors, factors that could cause actual results to differmaterially from those estimated by us include:

 
| · |   | Incorrect assumptions related to industry growth, overcapacity or  increased competition in the ethanol market in which we operate;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · |   | Fluctuations in the price and market for ethanol and distillers  grains;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| · |   | Availability and costs of products and raw materials, particularly  corn and natural gas;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| · |   | Changes in planned production, variations in actual ethanol and  distillers grains production from expectations or technical difficulties in  operating the plant;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| · |   | Our ability to market and our reliance on third parties to market our  products;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| · |   | Changes in or elimination of governmental laws,  tariffs, trade or other controls or enforcement practices such as:

 

·      federal  ethanol tax incentives;

·      national,  state or local energy policy;

·      legislation establishing a renewable fuel  standard or other legislation mandating the use of ethanol or other oxygenate  additives;

·      state and  federal regulation restricting or banning the use of MTBE; or

·      environmental  laws and regulations that apply to our plant operations and their  enforcement;

  |
| · |   | Changes in general economic conditions or the weather, or the  occurrence of certain events causing an impact in the agriculture, oil or  automobile industries;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| · |   | Lack of transport, storage and blending infrastructure preventing  ethanol from reaching high demand markets;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| · |   | Changes in total U.S. consumption of gasoline;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| · |   | Fluctuations in petroleum prices;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| · |   | Costs of construction and equipment;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| · |   | Our ability to implement our expansion plans;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| · |   | The loss of, or inability to obtain, any license or permit;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| · |   | Changes in our business strategy, capital improvements or development  plans;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| · |   | Changes in interest rates and the availability of credit to support  capital improvements, development, expansion and operations;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| · |   | Our liability resulting from litigation;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| · |   | Our ability to retain key employees and maintain labor relations;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| · |   | Financial impacts of our hedging strategies;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| · |   | Our ability to generate free cash flow to invest in our business and  service any debt financing we obtain in the future;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| · |   | Additional ethanol plants built in close proximity to our ethanol  facility in south central Wisconsin;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| · |   | The viability of First Missouri Energy LLC, a proposed ethanol  production facility in which we have invested;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| · |   | Changes and advances in ethanol production technology;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| · |   | Competition from alternative fuels and alternative fuel additives;  and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| · |   | Other factors described elsewhere in this report.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

 

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Thecautionary statements referred to in this section also should be considered inconnection with any subsequent written or oral forward-looking statements thatmay be issued by us or persons acting on our behalf.  We undertake no duty to update theseforward-looking statements, even though our situation may change in the future.Furthermore, we cannot guarantee future results, events, levels of activity,performance, or achievements.  We cautionyou not to put undue reliance on any forward-looking statements, which speakonly as of the date of this report.  You should read this report and thedocuments that we reference in this report and have filed as exhibitscompletely and with the understanding that our actual future results may bematerially different from what we currently expect.  We qualify all of ourforward-looking statements by these cautionary statements.

 

**Overview**

 

References to “we,” “us,” “our” and the “Company” refer to UnitedWisconsin Grain Producers, LLC.  UnitedWisconsin Grain Producers, LLC is a Wisconsin limited liability company thatmanages the business and day-to-day operations of a 60 million gallon per year(“MGY”) ethanol plant near Friesland, Wisconsin.  The ethanol plant was originally constructedas a 40 MGY facility, but in late 2007 the plant’s production capacity wasexpanded to 60 MGY.  We began operatingat this expanded production capacity in July 2008, although we expect tooperate at less than full capacity during the next several months due totightening industry margins.  Weanticipate further increasing our production capacity to 90 MGY by the firstquarter of 2010.

 

We have been engaged in the production of ethanol and distillers grainsat our plant near Friesland, Wisconsin since May 2005. Our revenues arederived from the sale and distribution of ethanol and distillers grainsthroughout the continental United States and overseas. In fiscal year 2008, weanticipate producing approximately 56.7 million gallons of ethanol and 168,000tons of distillers grains from approximately 19.9 million bushels of corn.However, there is no guarantee that we will be able to operate at theseproduction levels.  Additionally, we maychoose not to operate at these production levels due to tightening industrymargins.  In the future we expect toderive additional revenues from the extraction and sale of corn oil.

 

We aresubject to industry-wide factors that affect our operating and financialperformance.  Our operating results are largely driven by the prices atwhich we sell ethanol and distillers grains and the costs related to theirproduction, particularly corn and natural gas costs.  Historically, theprice of ethanol tends to fluctuate in the same direction as the price ofunleaded gasoline and other petroleum products.  However, in 2007 surplusethanol supplies due to increased industry production capacity put significantdownward pressure on ethanol prices, even as unleaded gasoline pricesincreased.  More recently, ethanol priceshave increased along with the increase in the price of crude oil and otherpetroleum-based commodities.  In addition, the price of ethanol isgenerally influenced by factors such as general economic conditions, theweather, the season, and government policies and programs.  The price ofdistillers grains is generally influenced by supply and demand, seasonalfluctuations and the price of substitute livestock feed, such as corn andsoybean meal and other animal feed proteins.  Recently, increasing demandfor corn and/or protein supplies has caused an upward trend in distillersgrains pricing.  In addition, our revenues are also impacted by factorssuch as our dependence on one or a few major customers who purchase anddistribute our primary product; the intensely competitive nature of ourindustry; possible legislative changes at the federal, state and/or local leveland changes in federal ethanol tax incentives.

 

Ourtwo largest costs of production are corn and natural gas.  Both of these costsare affected by factors largely out of our control.  Corn prices continueto increase to record high prices, despite record setting corn crops in recentyears.  The cost of corn is affectedprimarily by the market’s perception of supply and demand factors such as cropproduction, industry year-end inventories, exports, government policies andprograms, risk management and weather.  The growth of the ethanol industryitself has increased the average price of corn and is expected to continue to supportthe increased average price of corn as the global demand for corn continues torise.

 

On June 18,2008, the United States Congress overrode a presidential veto to approve theFood, Conservation and Energy Act of 2008 (the “2008 Farm Bill”) and to ensurethat all parts of the 2008 Farm Bill are enacted into law.  Passage of the 2008 Farm Bill reauthorizesthe 2002 farm bill and adds new provisions regarding energy, conservation,rural development, crop insurance as well as other subjects.   The energy title continues the energyprograms contained in the 2002 farm bill but refocuses certain provisions onthe development of cellulosic ethanol technology.  The new legislation provides assistance forthe production, storage and transport of cellulosic 

 

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feedstocks and providessupport for ethanol production from such feedstocks in the form of grants,loans and loan guarantees.  The 2008 FarmBill also modifies the ethanol fuels credit from 51 cents per gallon to 45cents per gallon beginning in 2009.  Thebill also extends the 54 cent per gallon ethanol tariff on imported ethanol fortwo years, to January 2011.  The2008 Farm Bill is distinct from the Energy Independence and Security Act of2007, which contains the renewable fuels standard.

 

Naturalgas prices fluctuate with the energy complex in general, but also haveindependent cost factors such as weather in the production areas, productiondisruption, storage levels, pipeline capacity and weather in use areas. Recently, we have experienced significantly higher natural gas prices than inthe past.  We expect natural gas pricesto remain well above historical levels due to the recent increase in energyprices generally.  Our costs ofproduction are also affected by the cost of complying with the extensiveenvironmental laws that regulate our industry.

 

We expect to fund ouroperations during the next twelve months using cash flow from continuingoperations, our existing line of credit and additional debt financing.  We expect to continue ongoing research anddevelopment activities in the next twelve months in the form of commissioningstudies on internal energy generation in conjunction with our plant productioncapacity increases. In particular, we are looking at the possibility of usingpost-fermentation corn solids or other renewable fuel as an energy source,thereby offsetting our natural gas usage. Due to this ongoing evaluation and analysis work, we have postponed thecompletion date for the planned 60 to 90 MGY capacity increase because ourenergy technology choice will impact the design of the additional 30 MGY ofcapacity.  Tightening industry marginshave also delayed the planned completion date of our additional expansion.

 

**Resultsof Operations**

 

***Comparisonof the three months ended June 30, 2008 and 2007***

 

Thefollowing table shows the results of our operations and the percentage ofrevenues, cost of goods sold, operating expenses and other items to totalrevenues in our statement of operations for the three months ended June 30,2008 and 2007:

 
| ** **                                      | ** ** | **Three months ended  June 30, 2008  (Unaudited)** | ** ** | **Three months ended  June 30, 2007  (Unaudited)** | ** ** |
|-------------------------------------------------|------------|------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| **Statement of Operations Data** | ** ** | **Amount**                                                             | ** ** | **%**                                                                  | ** ** | **Amount** | ** ** | **%** | ** ** |
| Revenues                                        |       | $                                                                      | 36,188,592 |                                                                   | 100.0      |   | $ | 28,187,346 |   | 100.0 |   |
|                                            |       |                                                                   |       |                                                                   |       |   |   |   |   |
| Cost of Goods Sold                              |       | $                                                                      | 23,633,515 |                                                                   | 65.3       |   | $ | 21,525,312 |   | 76.4 |   |
|                                            |       |                                                                   |       |                                                                   |       |   |   |   |   |
| Gross Profit                                    |       | $                                                                      | 12,555,077 |                                                                   | 34.7       |   | $ | 6,662,034 |   | 23.6 |   |
|                                            |       |                                                                   |       |                                                                   |       |   |   |   |   |
| Operating Expenses                              |       | $                                                                      | 951,163    |                                                                   | 2.6        |   | $ | 886,536 |   | 3.1 |   |
|                                            |       |                                                                   |       |                                                                   |       |   |   |   |   |
| Operating Income                                |       | $                                                                      | 11,603,914 |                                                                   | 32.1       |   | $ | 5,775,498 |   | 20.5 |   |
|                                            |       |                                                                   |       |                                                                   |       |   |   |   |   |
| Other Expense                                   |       | $                                                                      | (735,024   | )                                                                      | 2.0        |   | $ | (80,781 | ) | (0.3 | ) |
|                                            |       |                                                                   |       |                                                                   |       |   |   |   |   |
| **Net Income**                                  |       | $                                                                      | 10,868,890 |                                                                   | 30.0       |   | $ | 5,694,717 |   | 20.2 |   |

 

*Revenues*.  Revenues fromoperations for the three months ended June 30, 2008 totaled $36,188,592. In the three months ended June 30, 2008 ethanol comprised approximately85% of our revenues and distillers grain sales (DGS) comprised approximately15% of our revenues.  Revenues fromoperations for the three months ended June 30, 2007 totaled $28,187,346 of which ethanol comprised approximately89% and distillers grains comprised approximately 11%.  The 28% increase in revenues for the threemonths ended June 30, 2008 as compared to the same period in the previousyear is due to a 4.9% increase in gallons sold, a 7.7% increase in tons ofdistillers grain sold, a 13.9% increase in the price of ethanol and a 62.2%increase in the price of distillers grains.

 

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Thevolume of ethanol sold in the three months ended June 30, 2008 increasedby 4.9% over the same quarter in 2007. This volume increase is due to the increase in production capacityresulting from the plant expansion substantially completed in December 2007.See “**Management’s Discussion and Analysis ofFinancial Condition and Results of Operations - Plant Expansion andConstruction in Process**.” Our 7.7% increase in the amount ofdistillers grains sold also resulted from our increased production capacity.

 

Theprice of ethanol in the three months ended June 30, 2008 was upapproximately 13.9% from the price for the three months ended June 30,2007.  Ethanol prices have trended higherover the last several months.  The lowestrecent prices were seen in October 2007, following a downward trend thatbegan after ethanol prices peaked in July 2006.  Management currently expects short-term andmid-term ethanol prices to remain higher than historical averages due to a highdemand for ethanol which may be contributed to by a number of factors,including the use of ethanol as an oxygenate to replace MTBE, the high price ofgasoline encouraging voluntary blending of ethanol and the growing recognitionof ethanol as an alternative energy source. However, management believes the industry will need to continue to growdemand in order to increase or sustain current prices.  According to the Renewable Fuels Association,as of July 24, 2008 there were 162 ethanol plants in operation nationwidewith the capacity to produce more than 9.4 billion gallons of ethanol annually,with an additional 41 new plants and seven expansions under constructionexpected to add an additional estimated 4.2 billion gallons of annualproduction capacity in the next 12 to 18 months.  Unless this new supply is equally met withincreased demand, ethanol prices may be pressured downward.  If ethanol prices decline, our earnings willalso decline, particularly if corn prices remain substantially higher thanhistoric averages.

 

Our revenues include no gain or loss for the threemonths ended June 30, 2008 and a loss of approximately $599,000 for thethree months ended June 30, 2007, related to our ethanol derivativeinstruments.  We recognize the gains or losses that result from thechanges in the value of our ethanol-related derivative instruments in revenuesas the changes occur.  As ethanol prices fluctuate, the value of ourethanol-related derivative instruments changes, affecting our financialperformance.  We expect the volatility in these derivative instruments tocontinue to have an effect on our revenues due to the timing of the changes invalue of the derivative instruments relative to our sales.  These instrumentsare the primary tools of our risk management program for ethanol revenues.

 

Thesales prices for our distillers grains for the three months ended June 30,2008 were up 62.2% from the three months ended June 30, 2007.  The rising cost of corn and other alternativefeed sources has pushed distillers grains prices upward.  Distillers grains prices are expected tofollow the price of corn for the foreseeable future unless the price of soybeanmeal or other protein sources changes significantly.  Additionally, an increased supply ofdistillers grains resulting from additional ethanol production may put downwardpressure on distillers grains prices. Recent decreased demand from export markets has also put downwardpressure on distillers grains prices.

 

*Cost of Goods Sold*.  Our cost of goods sold fromthe production of ethanol and distillers grains is primarily made up of rawgrains expenses (corn) and energy expenses (natural gas and electricity).  Cost of goods sold for the three months endedJune 30, 2008 totaled $23,633,515 as compared to $21,525,312 for the threemonths ended June 30, 2007.  The 10%increase in cost of goods sold in the three months ended June 30, 2008 ascompared to the same period in 2007 is primarily a net result of a 65.9%increase in the cost of corn and a 49.0% increase in the cost of natural gas,partially offset by the $9,214,861 gain related to our corn derivativeinstruments discussed below.

 

Theaverage corn price for the three months ended June 30, 2008 was 58.6%higher than the average for the three months ended June 30, 2007.  We used 4.6% more corn during the threemonths ended June 30, 2008 as compared to the same period in 2007 as aresult of our increased production capacity. Corn prices have continued to trend higher in price over the last 3months.  The weak value of the dollar haskept exports of corn strong and high input costs have led to producers plantingfewer acres to corn this year, as indicated by the crop production reportreleased July 11, 2008.  Producershave planted approximately 87.3 million acres of corn this year, a reduction ofnearly 6.3 million acres versus last year, which has increased volatilitysurrounding the supply and demand picture for corn.  Recently, ethanol margins have tightenedconsiderably and livestock feeding margins are quite slim.  It is possible that these factors may reduce thedomestic demand for corn.  However,overall it appears likely that our cost of feedstock will be higher thanhistoric levels due the supply versus demand imbalance surrounding the 2008 and2009 crop years.  Unfavorable weatherconditions and flooding in the Midwest this year may lead to decreased cornyields and corn acres harvested.  Thismay have an unfavorable effect on corn prices.

 

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Our cost of goods sold includes a gain of$9,214,861 for the three months ended June 30, 2008 related to our cornderivative instruments as compared to a $15,923 loss for the three months endedJune 30, 2007.  We recognize the gains or losses that result from thechanges in the value of our corn-related derivative instruments in cost ofgoods sold as the changes occur.  As corn prices fluctuate, the value ofour derivative instruments changes, which affects our financialperformance.  We anticipate continued volatility in our cost of goods solddue to the timing of the changes in value of the derivative instrumentsrelative to the cost and use of the commodity being hedged.  Theseinstruments are the primary tools of our risk management program for cornprices.

 

Natural gas is also an important input to ourmanufacturing process.  The price of ournatural gas increased 42.9% for the three months ended June 30, 2008 ascompared to the same period in 2007.  Thevolume of natural gas we used increased 4.3% for the three months ended June 30,2008 as compared to the same period in 2007.  These increases in price and volume requiredresulted in a 49.0% increase in the cost of natural gas in the three monthsended June 30, 2008 as compared to the same period in 2007. We estimatethat our natural gas usage is approximately 140,000 million British thermalunits (“MMBTU”) per month when operating at a production rate of 60 milliongallons per year.  We use natural gas to dry a majority of our distillersgrains products to moisture contents at which they can be stored for longerperiods and transported greater distances, so that we can market them tobroader livestock markets, including poultry and swine markets in thecontinental United Statesand to markets in Asia.  Over the past two to three years natural gas has been availableonly at prices exceeding historical averages. These heightened prices increaseour costs of production.  In the last several months natural gas priceshave increased significantly, and we expect natural gas prices will remainvolatile into the near future as a result of instability in energy pricesgenerally.  Heightened natural gas priceswill continue to have a negative impact on our cost of goods sold. We havesecured a marketing firm and energy consultant for our natural gas supply andwill continue to work with them on an ongoing basis to mitigate our exposure tovolatile gas prices.  We have securedfirm pipeline capacity for natural gas delivery of 4,000 MMBTU per day and areworking towards securing additional pipeline capacity to accommodate our recentexpansion.

 

*Gross Profit*.  Gross profit for the three months ended June 30,2008 was $12,555,077, an 88.5% increase from the gross profit of $6,662,034 forthe three months ended June 30, 2007. This increase is due primarily to the $9,214,861 gain recognized fromour corn derivative instruments (see “Cost of Goods Sold” above), the 13.9%increase in the price of ethanol and the 62.2% increase in the price ofdistillers grains (see “Revenues” above), partially offset by net result of the65.9% increase in the cost of corn and 49.0% increase in the cost of naturalgas.

 

In the three months ended June 30, 2008, ourethanol-corn price spread was approximately $1.42, as compared to a spread ofapproximately $2.41 for the same period in 2007, a 41.1% decrease.  However, despite this decrease, our margin increased due to the hedgegain we recognized in the three months ended June 30, 2008. Our gross profitmargins for the three months ended June 30, 2008 and 2007 wereapproximately 34.7% and approximately 23.6%, respectively.  We calculate our spread as the price wereceive per gallon of ethanol, multiplied by the number of gallons of ethanolproduced per bushel of corn, minus the price we paid per bushel of corn.  The calculation of our spread does not takeinto account sale of distillers grains or expenses from inputs other than corn,including the natural gas we use to dry our distillers grains.  The spread between the price we receive forour products and the costs of our raw materials may not continue at a favorablerate in the future.  The rapidlyincreasing supply of ethanol may outpace the demand for ethanol, placingadditional downward pressure on our selling price and further eroding ourmargins.  The increased production ofethanol from corn in the industry may contribute to the already increasingdemand for corn and exceed the supply of corn, increasing our cost of corn andreducing our profit margin.  A decreasein profit margin will adversely affect our financial performance.

 

*Operating Expenses*.  Operating expenses were$951,163 for the three months ended June 30, 2008 as compared to $886,536for three months ended June 30, 2007. The increase in operating expenses is primarily a result of increasedgeneral and administrative expenses related to our employee high earningsreward program.  Operating expenses as apercentage of revenues were 2.6% and 3.1% for the three months ended June 30,2008 and June 30, 2007, respectively.

 

*Operating Income*.  Operating income for three months ended June 30, 2008 totaled$11,603,914, or 32.1% of revenues. Operating income for thethree months ended June 30, 2007 totaled $5,775,498, or 20.5% ofrevenues.  The increase in operating income for the three months ended 

 

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June 30,2008 compared to the three months ended June 30, 2007 is primarily a netresult of the net increase in “Gross Profit” (discussed above) and the increasein “Operating Expenses” (discussed above).

 

*Other Income (Expense)*.  Our other income (expense) for the threemonths ended June 30, 2008 was an expense of$735,024 as compared to an expense of $80,781 for the three months ended June 30,2007.  Our other income (expense) itemsfor the three month periods ended June 30,2008 and June 30, 2007 consisted primarily of equity in net loss ofinvestment, interest income, interest expense and net miscellaneousincome.  The increase in equity in netloss of investment was the result of our impairment loss related to ourinvestment in the First Missouri Energy project.  Our decrease in interest expense isattributable to the retirement of our long-term debt in April 2008.  Our decrease in interest income is the resultof utilizing interest-bearing cash to retire our debt.  Finally, the increase in our miscellaneousincome is attributable to us obtaining a grant based on energy efficientequipment installed at the plant.

 

***Comparison of the six months ended June 30, 2008 and 2007***

 

The following table shows the results of ouroperations and the percentage of revenues, cost of goods sold, operatingexpenses and other items to total revenues in our statement of operations forthe six months ended June 30, 2008 and 2007:

 
| ** **                                      | ** ** | **Six months ended  June 30, 2008  (Unaudited)** | ** ** | **Six months ended  June 30, 2007  (Unaudited)** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **Statement of Operations Data** | ** ** | **Amount**                                                           | ** ** | **%**                                                                | ** ** | **Amount** | ** ** | **%** | ** ** |
| Revenues                                        |       | $                                                                    | 70,425,979 |                                                                 | 100.0      |   | $ | 57,189,138 |   | 100.0 |   |
|                                            |       |                                                                 |       |                                                                 |       |   |   |   |   |
| Cost of Goods Sold                              |       | $                                                                    | 49,424,481 |                                                                 | 70.2       |   | $ | 42,601,260 |   | 74.5 |   |
|                                            |       |                                                                 |       |                                                                 |       |   |   |   |   |
| Gross Profit                                    |       | $                                                                    | 21,001,498 |                                                                 | 29.8       |   | $ | 14,587,878 |   | 25.5 |   |
|                                            |       |                                                                 |       |                                                                 |       |   |   |   |   |
| Operating Expenses                              |       | $                                                                    | 1,904,566  |                                                                 | 2.7        |   | $ | 1,652,154 |   | 2.9 |   |
|                                            |       |                                                                 |       |                                                                 |       |   |   |   |   |
| Operating Income                                |       | $                                                                    | 19,096,932 |                                                                 | 27.1       |   | $ | 12,935,724 |   | 22.6 |   |
|                                            |       |                                                                 |       |                                                                 |       |   |   |   |   |
| Other Expense                                   |       | $                                                                    | (735,495   | )                                                                    | (1.0       | ) | $ | (98,138 | ) | (0.2 | ) |
|                                            |       |                                                                 |       |                                                                 |       |   |   |   |   |
| **Net Income**                                  |       | $                                                                    | 18,361,437 |                                                                 | 26.1       |   | $ | 12,837,586 |   | 22.4 |   |

 

*Revenues*.  Revenues from operations for the six monthsended June 30, 2008 totaled $70,425,979, as compared to $57,189,138 for the six months ended June 30,2007.  The 23% increase in revenues forthe six months ended June 30, 2008 as compared to the same period in theprevious year is primarily due to an increase in ethanol production and pricesand an increase in distillers grains production and prices, as discussed in “RESULTSOF OPERATIONS – *Comparison of the three months ended June 30,2008 and 2007*.”

 

*Cost of Goods Sold*.  Our cost of goods sold for thesix months ended June 30, 2008 totaled $49,424,481, as compared to $42,601,260 for the six months ended June 30,2007.  The 16% increase in cost of goodssold for the six months ended June 30, 2008 as compared to the same periodin the previous year is primarily due to an increase in the cost of corn andnatural gas, as discussed in “RESULTS OF OPERATIONS – *Comparisonof the three months ended June 30, 2008 and 2007*.”

 

*Gross Profit*.  Gross profit for the six months ended June 30,2008 was $21,001,498, a 44% increase from the gross profit of $14,587,878 forthe six months ended June 30, 2007. This increase is due primarily to the gain recognized from our cornderivative instruments and increases in the prices of ethanol and distillersgrains, offset by increases in the prices of corn and natural gas, as discussedin “RESULTS OF OPERATIONS – *Comparison of the three months ended June 30, 2008 and 2007*.”

 

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In the six months ended June 30, 2008, ourethanol-corn price spread was approximately $1.54, as compared to a spread ofapproximately $2.61 for the same period in 2007, a 41.0% decrease.  However, despite this decrease, our margin increased due to the hedgegain we recognized in the six months ended June 30, 2008. Our gross profitmargins for the three months ended June 30, 2008 and 2007 wereapproximately 29.8% and approximately 25.5%, respectively.  For a further discussion regarding thecalculation of our spread, see “RESULTSOF OPERATIONS – *Comparison of the three months ended June 30,2008 and 2007*.”

 

*Operating Expenses*.  Operating expenses were$1,904,566 for the six months ended June 30, 2008 as compared to$1,652,154 for the six months ended June 30, 2007.  The increase in operating expenses isprimarily a result of increased general and administrative expenses, as discussed in “RESULTS OF OPERATIONS – *Comparisonof the three months ended June 30, 2008 and 2007*.”  Operating expenses as a percentage ofrevenues were 2.7% and 2.9% for the six months ended June 30, 2008 and June 30,2007, respectively.

 

*Operating Income*.  Operating income for the six months ended June 30, 2008 totaled$19,096,932, or 27.1% of revenues. Operating income for thesix months ended June 30, 2007 totaled $12,935,724, or 22.6% of revenues.  Theincrease in operating income for the six months ended June 30, 2008compared to the six months ended June 30, 2007 is primarily a net resultof the net increase in “Gross Profit” and the increase in “Operating Expenses,”as discussed above.

 

*Other Income (Expense)*.  Our other income (expense) for the six monthsended June 30, 2008 was an expense of$735,495, as compared to an expense of $98,138 for the six months ended June 30,2007.  Our increase in other expense is anet result of an increase in equity in net loss of investment, a decrease ininterest income, a decrease in interest expense and increase in miscellaneousincome, as discussed in “RESULTSOF OPERATIONS – *Comparison of the three months ended June 30,2008 and 2007*.”

 

**Changes in Financial Condition for the Six months ended June 30,2008 Compared to the Fiscal Year ended December 31, 2007.**

 

Assets totaled $83,336,958 on June 30, 2008,as compared to $86,538,195 on December 31, 2007.  Current assets totaled $30,114,021 on June 30,2008, as compared to $33,920,040 on December 31, 2007.  This change resulted from (i) areduction in cash and cash equivalents on hand, which is primarily a net resultof an increase in cash from operations, less the $7,175,000 cash used for ourmember distributions in February 2008, $14,356,139 cash used to retire ourlong-term debt in April 2008, $4,246,181 used for capital expenditures andconstruction in process, and $677,800 used for the repurchase of membershipunits, (ii) a $1,515,442 increase in our restricted cash related to ourmargin requirement for our derivative instruments, (iii) an increase of$2,884,674 in the asset value of our derivative instruments and (iv) anincrease of $2,954,041 in our inventory balance related to our added cornstorage capacity.

 

Our investment assets totaled $993,065 on December 31,2007as compared to $113,986 on June 30, 2008. This decrease in our investment assets is the direct result of animpairment loss of $866,000 in our investment in First Missouri EnergyLLC.  During April 2008 wedetermined that the viability in the near future of the First Missouri Energyproject was in question.  We based thisdetermination on the proposals to delay, modify or repeal state and federalsubsidies and programs which would have a negative impact on the project.

 

Current liabilities were $4,699,907 on June 30,2008, as compared to $5,311,894 on December 31, 2007. This decrease is thenet result of a decrease in current maturities of long-term debt related to theretirement of our long-term debt, an increase in accounts payable and anincrease in accrued liabilities related to increased natural gas costs.  Long term debt, less current maturities,totaled $0 on June 30, 2008, as compared to $13,097,887 on December 31,2007.  This reduction in long-term debtis also a direct reflection of the retirement of our long-term debt.

 

Members’ equity totaled $78,637,051 on June 30,2008, as compared to $68,128,414 on December 31, 2007.  This change is a net result of earnings forthe six months less the $7,175,000 membership distribution paid out in February 2008and $677,800 paid out for the repurchase of membership units during theperiod.  On June 11, 2007 theboard approved up to $1,000,000 to explore/pursue the option of buying backmembership units over the 

 

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following twelve months.  Thisrepurchase program expired in June 2008. As of June 30, 2008, we had repurchased of a total of 305 membershipunits for $901,050.

 

**Liquidity and Capital Resources**

 

***Comparison of the six months ended June 30,2008 and 2007***

 

The following table shows cash flows for the sixmonths ended June 30, 2008 and 2007:

 
| ** **                                | ** ** | **Six months ended June 30** | ** **  |
|-------------------------------------------|------------|--------------------------------------------------|-------------|
| ** **                                | ** ** | **2008**                                         | ** **  | **2007** | ** ** |
| Net cash provided by operating activities |       | $                                                | 15,803,581  |   | $ | 15,938,507 |   |
| Net cash used in investing activities     |       | $                                                | (4,246,181  | ) | $ | (5,186,990 | ) |
| Net cash used in financing activities     |       | $                                                | (22,208,939 | ) | $ | (14,962,932 | ) |

 

*Cash Flow Provided byOperations.** *Our net cash flow provided from operating activities for the six monthsended June 30, 2008 was $15,803,581, as compared to $16,082,922 for thesame period the previous year.  Thedecrease in net cash flow provided from operating activities for the six monthsended June 30, 2008 compared to the six months ended June 30, 2007was primarily due to a change in the fair value of our derivative instruments,changes in inventory value related to increasing corn prices and quantity,changes in restricted cash related to our margin deposit requirement andchanges to accounts receivable, netted against changes to our equity in netloss of investment, accounts payable, prepaid expenses and accruedliabilities.  Our capital needs are adequately met through cash from ouroperating activities and our current revolving line of credit.

 

*Cash Flow Used InInvesting Activities.** *Our net cash flow used in investingactivities for the six months ended June 30, 2008 constituted expendituresof $3,966,840, as compared to expenditures of $5,186,990 for the six monthsended June 30, 2007.

 

OnFebruary 12, 2007, our board approved up to a $10 million investment for anapproximate 28% ownership interest in a joint venture, First Missouri EnergyLLC, to construct and operate a 55 million gallon capacity ethanol plant atCape Girardeau, Missouri.  As of June 30, 2008, we have invested $1,155,000 in this projectand do not expect to contribute any additional capital.  In April 2008, we determined that theviability of this project in the near future was in question. We based thisdetermination on the proposals to delay, modify, or repeal state and federalsubsidies and programs which would have a negative impact on thisproject.  Accordingly, we recorded an impairment loss of approximately$866,000 on this investment in the quarter ended June 30, 2008.  We believe the remaining asset owned by FirstMissouri Energy LLC, primarily land, is recoverable. The board of FirstMissouri Energy is currently assessing its options to delay further work and developmentof the project.

 

We presently estimate that an additional $25,000,000will be spent over the next eighteen months for an additional 30 million gallonper year ethanol production facility at our plant site, all of which isexpected to be financed from a portion of cash flows from operations andadditional debt financing.  See “**Plant Expansion and Construction in Process**” below fordetails regarding additional debt financing.  Weare in the process of determining whether this 30 million gallon facility willbe a stand-alone facility or part of an expansion to our existing plant.  Utilizing cash generated from operations forthe plant expansion may impact our ability to pay out future memberdistributions.  Our projections are basedupon our historical operating costs and historical revenues.  However, our past financial performance maynot accurately predict future results.  We currently estimate the 30million gallon per year expansion facility will be complete by the firstquarter of 2010; however, construction may not stay on schedule and we may notbe able to operate at the expanded production levels by the first quarter of2010.

 

*Cash Flow Used In FinancingActivities.** *Our net cash flowused in financing activities for the six months ended June 30, 2008constituted expenditures of $22,208,939, as compared to expenditures of$14,962,932 for the six months ended June 30, 2007.  We used cash to pay down our debt by$14,356,139 and $572,932 during the six months ended June 30, 2008 and June 30,2007, respectively.  Our payments duringthe six months ended June 30, 2008 retired our long-term debt.  During the six months ended June 30,2008, we made cash distributions to our 

 

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members in the amount of $7,175,000 as compared to$14,390,000 in the six months ended June 30, 2007.  These distributions were funded with cashfrom operations.  Also, during the sixmonths ended June 30, 2008, we expended $677,800 for the repurchase ofmembership units, as compared to no membership unit repurchases for the sameperiod in 2007.  See Part II, Item 2of this report. These repurchases were funded with cash from operations.

 

Weexpect to have sufficient cash from cash flow generated by continuingoperations, our revolving line of credit, cash reserves and the additional debtfinancing we expect to obtain for our production expansions.  See “**Plant Expansion andConstruction in Process**” below. A cash shortage may impact our ability to pay out future memberdistributions.  In the event of a cashshortage, in addition to seeking additional debt financing we may also considerseeking equity financing.  If we fail to obtain either debt or equityfinancing, we will not be able to construct Phase II of our expansion.

 

***Short-Term and Long-Term Debt Sources***

 

On January 10, 2008 our board voted to retirethe balance of our existing long-term debt with Farmers & Merchants UnionBank.  The term loan was subsequently retired on April 24, 2008 usingprimarily cash from operations.  Weexpect to obtain additional debt financing of between approximately $19,000,000and $29,000,000 over the next twelve months to finance our additionalproduction capacity.  See “**Plant Expansion and Construction in Process**” below.

 

We have a $5,000,000 revolving line of credit withFarmers & Merchants Union Bank that is secured by substantially all ofour assets.  Interest is due monthly onthis revolving credit facility.  As of June 30,2008, we did not have any borrowings on the revolving line of credit.  The interest rate on the revolving line ofcredit is fixed at 7.4% until May 2011. There is an annual service fee of $10,000 on the revolving creditagreement.  The revolving line of creditcan be terminated prior to its maturity, thereby discontinuing the servicefee.  No prepayment fees exist on therevolving credit facility.

 

Our revolving credit facility is subject toprotective covenants requiring us to maintain various financial ratios. We arerequired to maintain a minimum tangible net worth of $24,000,000 and toincrease our tangible net worth annually by the lesser of $500,000 or an amountequal to retained earnings.  Our owners’equity is to be at least 45% of tangible net assets and we must maintain aworking capital position of at least $4,000,000.  We must receive written approval from ourlender to exceed $1,000,000 in annual capital expenditures and we must obtainconsent prior to making membership distributions in excess of 65% of theprevious year’s net income, excluding state and federal incentivepayments.  As of June 30, 2008, weare in compliance with all of our financial debt covenants.  The revolving line of credit remains securedby substantially all of our assets.

 

**PlantExpansion and Construction in Process**

 

Weretired our long-term debt with Farmers & Merchants Union Bank on April 24,2008.  However, we expect to obtainbetween approximately $19,000,000 and $29,000,000 in additional debt financingover the next twelve months to finance our plant expansion.  In December 2007, we substantiallycompleted an expansion of our plant to 60 million gallons per year (“Phase I”of our expansion).  We gradually broughtvarious components of our capacity expansion online and began operating at ourexpanded capacity of 60 million gallons per year, the capacity permitted by ourconstruction permit, in July 2008. However, we expect to operate at less than full capacity during the nextseveral months due to tightening industry margins.  Phase I of our expansion entailed increasingthe cook and fermentation system capacity. As of June 30, 2008, we had incurred approximately $6.7 million incapital expenditures for Phase I, which was the budgeted amount for theexpansion.  We funded this amount usingcash from operations.

 

In June 2008, we completed the expansion of our grain storage capacityfrom 450,000 bushels to 900,000 bushels, a $1,319,000 project funded with cashfrom operations.

 

Otherplant improvements are currently underway. A new loading system, including aseparate loading bay, is under construction in the grain receiving area, a$1,124,000 project also approved by our board on May 10, 2007.  We expect to complete this project in August 2008.  A new distillers 

 

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grainscooling and conveying system is also underway, a $2,050,000 project approved byour board on June 11, 2007.  Weexpect to complete this project in August 2008.  Whereas these improvements will not increasecapacity and they are not part of our “capacity expansion plans,” they willcontribute to operational efficiency and customer service.  All of these projects are in progress and asof June 30, 2008 we had incurred approximately $3,400,000 inconstruction-in-process costs towards their completion.  Additionally, on June 12, 2008 our boardapproved moving forward with a corn oil extraction project at an estimated costof approximately $3,671,300. We expect to fund each of these projects usingcash from operations.

 

Wehave engaged an engineering firm to assist in developing a plan to add anadditional 30 million gallons of production capacity at our plant site (“PhaseII” of our expansion).  The estimatedcost of this expansion is approximately $35,000,000, although we have notfinalized the design and the scope of work at this time.  We expect to finance this amount usingbetween approximately $19,000,000 to $29,000,000 in debt financing and theremainder from cash from operations. Obtaining additional debt financing couldlimit our ability to make member distributions as they have occurred in thepast, especially if cash from operations decreases due to narrowing profitmargins. We may not be able to finance our expansion as anticipated. If we areunsuccessful in obtaining debt financing we may seek other alternatives,including equity financing, or, if we fail to obtain either debt or equity financing,we will not be able to construct Phase II of our expansion.  Some capital expenditures have been madetowards the areas of this project that have been defined.  On May 10, 2007, the board approved anexpenditure of $1,350,000 for the centrifuges, on June 11, 2007 the boardapproved an expenditure of $16,700,000 for the expansion of the distillation,dehydration, and evaporation (DD&E) system, on January 10, 2008, theboard approved an expenditure of $1,250,000 for the addition of a coolingtower, and on March 10, 2008, the board approved an expenditure of$3,150,000 for a regenerative thermal oxidizer (RTO).  As of June 30, 2008, we have incurredconstruction-in-process costs of approximately $2,900,000 towards Phase II ofour expansion, in addition to the $3,400,000 in construction-in-process costsfor other projects discussed above. All of the funds expended thus far on ourplant expansions and other plant improvements have been from income derivedfrom operations.

 

**Subsequent Events**

 

OnJuly 14, 2008, our board voted to make a cash distribution of $200 permembership unit for a total distribution of $5,695,000 to our unit holders ofrecord as of July 14, 2008.  We expect the distribution to be made onor about August 15, 2008.

 

**Off Balance Sheet Arrangements.**

 

We currently do not have any off-balance sheetarrangements.

 

**Application of Critical Accounting Estimates**

 

Managementuses estimates and assumptions in preparing our financial statements inaccordance with generally accepted accounting principles.  These estimatesand assumptions affect the reported amounts of assets and liabilities, thedisclosure of contingent assets and liabilities, and the reported revenues andexpenses.  We had the following criticalaccounting estimates as of the three and six months ended June 30, 2008,as compared to December 31, 2007, when we had no critical accountingestimates.

 

We review long-lived assets for impairmentwhenever events or changes in circumstances indicate that the related carryingamounts may not be recoverable.  Impairment testing for assets requiresvarious estimates and assumptions, including an allocation of cash flows tothose assets and, if required, an estimate of the fair value of thoseassets.  Our estimates are based uponassumptions believed to be reasonable, but which are inherently uncertain andunpredictable. These valuations require the use of management’s assumptions,which do not reflect unanticipated events and circumstances that mayoccur.  In our analysis, we considerfuture corn costs and ethanol prices, break-even points for our plant and ourrisk management strategies in place through our derivative instruments andforward contracts.  Given the significantassumptions required and the possibility that actual conditions will differ, weconsider the assessment of impairment of our long-lived assets to be a criticalaccounting estimate.

 

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Ourallowance for doubtful accounts as of June 30, 2008 and December 31,2007 was $94,000 and $69,000, respectively. These amounts are based on our historical experience and take intoaccount factors such as our marketing agreements in place for the marketing andsale of all of our ethanol and a portion of our distillers grains, the paymentdue date for such ethanol and distillers grains relative to when our marketerstake possession of the products, and our past success in collecting payment forthe ethanol and distillers grains sold pursuant to our marketingagreements.  Because our allowance fordoubtful accounts is based in part on our assumption that our future collectionof accounts will be similar to our historical experiences, we consider this tobe a critical accounting estimate. In the event we are no longer able toeffectively market our ethanol and a portion of our distillers grains throughour marketers, we may need to consider a greater allowance for doubtfulaccounts.

 

**Item 3.  Quantitative and QualitativeDisclosures About Market Risk.**

 

We are exposed to the impact of market fluctuations associated withcommodity prices as discussed below.  We have no exposure to foreigncurrency risk, as all of our business is conducted in U.S. Dollars, or to interestrate risk, as the interest rate for our revolving loan commitment is fixed at7.4% until May 2011.  Our term debt, which also had a fixed interestrate of 7.4%, was retired on April 24, 2008. We use derivative financialinstruments as part of an overall strategy to manage market risk.  We usecash, futures and option contracts to hedge changes to the commodity prices ofcorn and gasoline. We do not enter into these derivative financial instrumentsfor trading or speculative purposes, nor do we designate these contracts ashedges for accounting purposes pursuant to the requirements of SFAS 133, *Accounting for Derivative Instruments and HedgingActivities*.

 

**CommodityPrice Risk**

 

We are exposed to market risk from changes incommodity prices.  Exposure to commodity price risk results from ourdependence on corn and natural gas in the ethanol production process, and ourreliance on sales of ethanol.  We seek to minimize the risks fromfluctuations in the prices of corn and ethanol through the use of derivativeinstruments.  In practice, as markets move, we actively manage our riskand adjust hedging strategies as appropriate.  Although we believe ourhedge positions accomplish an economic hedge against our future purchases, theyare not designated as such for hedge accounting purposes, which would match thegain or loss on our hedge positions to the specific commodity purchase beinghedged.  We mark to market our hedge positions, which means as the currentmarket price of our hedge positions changes, the gains and losses areimmediately recognized.  We recognizesuch gains and losses in our revenues (ethanol) and costs of goods sold (cornand natural gas) because we believe this best matches the gain (loss) with theproper line item.

 

The immediate recognition of hedging gains and losses can cause netincome to be volatile from quarter to quarter due to the timing of the changein value of the derivative instruments relative to the cost and use of thecommodity being hedged.  At June 30, 2008 and December 31, 2007,the fair value of our derivative instruments for corn and gasoline is an assetin the amount of $2,889,863 and an asset in the amount of $5,189,respectively. There are several variables that could affect the extent towhich our derivative instruments are impacted by price fluctuations in the costof corn or gasoline. However, it is likely that commodity cash prices will havethe greatest impact on the derivative instruments with delivery dates nearestthe current cash price.

 

To manage our corn price risk, our hedging strategy is designed toestablish a price ceiling and floor for our corn purchases.  We have takena net long position on our exchange-traded futures and options contracts, whichallows us to offset increases or decreases in the market price of corn. The upper limit of loss on our futures contracts is the difference between thecontract price and the cash market price of corn at the time of the executionof the contract.  The upper limit of loss on our exchange-traded and over-the-counteroption contracts is limited to the amount of the premium we paid for theoption.

 

We estimate that our expected corn usage (without taking into accountour additional expansion plans) is approximately 21.5 million bushels per yearfor the production of 60 million gallons of ethanol.  We have priceprotection in place for a portion of our expected corn usage through December 2009using forward contracts, CBOT futures and options and over-the-counter optioncontracts.  As we move forward, additional protection may benecessary.  As corn prices move in reaction to market trends andinformation, our income statement will be affected depending on the impact suchmarket movements have on the value of our derivative instruments.  As wemove forward, additional price protection may be required to solidify ourmargins.  Depending on market movements, 

 

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cropprospects and weather, these price protection positions may cause immediateadverse effects, but are expected to produce long-term positive growth for us.

 

We have also entered into gasoline derivative instruments to hedge thevariability of ethanol prices.  While not perfectly correlated, we havefound that ethanol and gasoline prices tend to move in tandem.  Therefore,the gasoline contracts the company has entered into are intended to offset cashdecreases in the price of ethanol we receive.

 

To manage our natural gas price risk, we have entered into forwardcontracts to purchase approximately 158,900 MMBTU of natural gas through September 2008at an average price of approximately $12.36 per MMBTU.  We may alsopurchase additional natural gas requirements for our fiscal year 2008 as weattempt to further reduce our susceptibility to price increases.

 

A sensitivity analysis has been prepared to estimate our exposure tocorn and gasoline price risk. The table presents the fair value of ourderivative instruments as of June 30, 2008 and December 31, 2007 andthe potential loss in fair value resulting from a hypothetical 10% adversechange in such prices.  The fair value of the positions is a summation ofthe fair values calculated by valuing each net position at quoted market pricesas of the applicable date. The results of this analysis, which may differ fromactual results, are as follows:

 
| ** **             | ** ** | **Fair Value** | ** ** | **Effect of Hypothetical  Adverse Change —  Market Risk** | ** ** |
|------------------------|------------|---------------------|------------|-----------------------------------------------------------------------------------------|------------|
| June 30, 2008     |       | $                   | 2,889,863  |                                                                                    | $          | (288,986 | ) |
| December 31, 2007 |       | $                   | 5,189      |                                                                                    | $          | (519 | ) |

 

**Item 4. Controls and Procedures**

 

Our management, including our Chief Executive Officer (the principalexecutive officer), J.F. Robertson, along with our Chief Financial Officer,(the principal financial officer), Barb Bontrager, have reviewed and evaluatedthe effectiveness of our disclosure controls and procedures as of June 30,2008.  Based upon this review and evaluation, these officers haveconcluded that our disclosure controls and procedures are effective in ensuringthat information required to be disclosed in the reports that we file or submitunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods required by the forms and rules of the Securities andExchange Commission; and in ensuring that the information required to bedisclosed in the reports that we file or submit under the Exchange Act isaccumulated and communicated to our management, including our principalexecutive and principal financial officers, or persons performing similarfunctions, as appropriate to allow timely decisions regarding requireddisclosure.

 

Our management, consisting of our principal executive officer andprincipal financial officer, have reviewed and evaluated any changes in ourinternal control over financial reporting that occurred during the fiscalquarter ended June 30, 2008 and there has been no change that hasmaterially affected or is reasonably likely to materially affect our internalcontrol over financial reporting.

 

**PART II.     OTHER INFORMATION**

 

**Item 1.****           Legal Proceedings**

 

From time to time in the ordinary course of business, we may be namedas a defendant in legal proceedings related to various issues, includingwithout limitation, workers’ compensation claims, tort claims, or contractualdisputes.  We are not currently involved in any material legalproceedings, directly or indirectly, and we are not aware of any claims pendingor threatened against us or any of the directors that could result in thecommencement of material legal proceedings.

 

**Item 1A. Risk Factors**

 

None.

 

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

 

**IssuerPurchase of Equity Securities**

 

We made the following membershipunit repurchases during the second quarter of our fiscal year 2008:(1)

 
| **Period**                                    | ** ** | **Total Number of  Units Purchased** | ** ** | **Average Price Paid  per Unit ($)** | ** **   | **Total Number of  Units Purchased as  Part of Publicly  Announced Plans  or Programs** | ** ** | **Approximate  Dollar Value of  Units that May Yet  Be Purchased  Under the Plans or  Programs ($)** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------------|--------------|---------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| April 1, 2008 – April 30, 2008 |       | 14                                                  |       | $                                                        | 2,900.00     |                                                                                                                            | 14         |                                                                                                                                                   | $          | 216,050 |   |
| May 1, 2008 – May31, 2008           |       | 15                                                  |       | $                                                        | 2,800.00     |                                                                                                                            | 15         |                                                                                                                                                   | $          | 174,050 |   |
| June 1, 2008 – June 30, 2008   |       | 27                                                  |       | $                                                        | 2,781.48     |                                                                                                                            | 27         |                                                                                                                                                   | $          | 98,950 |   |
| **Total**                                     | ** ** | **56**                                              | ** ** | **$**                                                    | **2,816.07** | ** **                                                                                                                      | **56**     | ** **                                                                                                                                             | **$**      | **98,950** | ** ** |

 

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(1) OnJune 11, 2007 the board approved expenditures of up to $1,000,000 topursue the option of redeeming membership units.  Prior to the purchaseslisted in the table above, the Company had repurchased a total of 249membership units for a total of $743,350, an average of $2,985.34 perunit.  As of June 30, 2008, the Company had repurchased a total of305 membership units for a total of $901,050, an average of $2,954.26 perunit.  The unit repurchase program expired on June 10, 2008.

 

**Item 3.****           Defaults Upon SeniorSecurities**

 

None.

 

**Item 4.****           Submission of Mattersto a Vote of Security Holders**

 

Weheld our 2008 annual meeting of the members on April 12, 2008.  The only matter voted upon at our 2008 annualmeeting was the election of three directors. A total of 22,519 membership unitswere represented at the meeting. Each of the three nominees for director waselected. Each nominee for director received votes as follows:

 
| **Name**         | ** ** | **Votes For** | ** ** | **Votes Against** | ** ** | **Abstain** | ** ** |
|------------------|------------|--------------------|------------|------------------------|------------|-------------|------------|
| Jerry H. Franz   |       | 15,595             |       | 10                     |       | 90          |       |
| Kevin M. Roche   |       | 15,640             |       | 10                     |       | 45          |       |
| Berwyn G. Westra |       | 15,615             |       | 35                     |       | 45          |       |

 

**Item 5.****           Other Information**

 

None.

 

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**Item 6.****           Exhibits**

 

(a)                               The following exhibitsare filed as part of this report:

 
| **Exhibit No.** | ** ** | **Exhibit**                                          | ** ** |
|----------------------|------------|------------------------------------------------------|------------|
|                 |       |                                                 |       |
| 31.1                 |       | Certificate pursuant to 17 CFR 240.13a-14(a.)        |       |
|                 |       |                                                 |       |
| 31.2                 |       | Certificate pursuant to 17 CFR 240.13a-14(a.)        |       |
|                 |       |                                                 |       |
| 32.1                 |       | Certificate pursuant to 18 U.S.C. Section 1350. |       |
|                 |       |                                                 |       |
| 32.2                 |       | Certificate pursuant to 18 U.S.C. Section 1350. |       |

 

**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
|       |                                   | **UNITED WISCONSIN GRAIN PRODUCERS, LLC**                              |
|------------|----------------------------------------|------------------------------------------------------------------------|
| ** ** | ** **                             | ** **                                                             |
| ** ** | ** **                             | ** **                                                             |
| Date:      |    August 14, 2008 |                                                                   | /s/ J.F. Robertson |
|       |                                   | J.F. Robertson                                                         |
|       |                                   | Chief Executive Officer   (Principal Executive Officer)                |
|       |                                   |                                                                   |
|       |                                   |                                                                   |
| Date:      |    August 14, 2008 |                                                                   | /s/ Barb Bontrager |
|       |                                   | Barb Bontrager                                                         |
|       |                                   | Chief Financial Officer   (Principal Financial and Accounting Officer) |
|            |                                        |                                                                        |  |  |

 

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