UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549











FORM 10-K





x           ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934





For
the fiscal year ended December 31, 2008





 ̈           TRANSITION
REPORT PURSUANT TO SECTION 13 OR


15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934





COMMISSION
FILE NO.  000-50253





SOUTH
DAKOTA SOYBEAN PROCESSORS, LLC


(Exact
Name of Registrant as Specified in its Charter)





South Dakota
            
            46-0462968(State of Other Jurisdiction of
              Incorporation or Organization)
            
            (I.R.S. Employer
              Identification No.)





100
Caspian Avenue, Post Office Box 500, Volga, South Dakota 57071


(Address
of Principal Executive Offices)





(605)
627-9240


(Registrant’s
Telephone Number)











SECURITIES
REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: NONE




SECURITIES
REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:





CLASS A
CAPITAL UNITS





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


 ̈  Yes      x  No





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


 ̈  Yes      x  No





Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.  x  Yes       ̈  No





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained in this form, and no
disclosure will be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this
Form 10-K.  x





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





 ̈  Large
      Accelerated Filer
                   ̈  Accelerated
      Filer
                  o  Non-Accelerated
      Filer
                  x  Smaller
      Reporting Company(do
      not check if a smaller reporting company)





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





The
aggregate market value of the registrant’s common stock held by non-affiliates
at June 30, 2008 was approximately $37,646,400. The aggregate market value
was computed by reference to the last sales price during the registrant’s most
recently completed second fiscal quarter.





As of the
day of this filing, there were 30,419,000 Class A capital units of the
registrant outstanding.





DOCUMENTS
INCORPORATED BY REFERENCE





Part III
of Form 10-K - Portions of the Information Statement for 2009 Annual
Meeting of Members.












CAUTIONARY
STATEMENT REGARDING


FORWARD-LOOKING
INFORMATION





This
Annual Report on Form 10-K and other reports issued by South Dakota Soybean
Processors, LLC (including reports filed with the Securities and Exchange
Commission (the “SEC” or “Commission”), contain “forward-looking statements”
that deal with future results, expectations, plans and performance. 
Forward-looking statements may include statements which use words such as
“believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “predict,”
“hope,” “will,” “should,” “could,” “may,” “future,” “potential,” or the
negatives of these words, and all similar expressions. These forward-looking
statements are made based on our expectations and beliefs concerning future
events affecting us and are subject to uncertainties and factors relating to our
operations and business environment, all of which are difficult to predict and
many of which are beyond our control, that could cause our actual results to
differ materially from those matters expressed in or implied by these
forward-looking statements. We do not undertake any responsibility to release
publicly any revisions to these forward-looking statements to take into account
events or circumstances that occur after the date of this report. Additionally,
we do not undertake any responsibility to update you on the occurrence of any
unanticipated events which may cause actual results to differ from those
expressed or implied by the forward-looking statements contained in this
report.  Important factors that could cause actual results to differ
materially from our expectations are disclosed under “Risk Factors” and
elsewhere in this report. As stated elsewhere in this report such factors
include, among others:





·
              Changes
      in the weather or general economic conditions impacting the availability
      and price of soybeans and natural
gas;





·
            Changes
      in business strategy, capital improvements or development
      plans;





·
            Changes
      in the availability of credit and interest
  rates;





·
              Damage
      to or loss of our facilities due to casualty, weather, mechanical failure
      or any extended or extraordinary maintenance or inspection that
      may be required;





·
            Fluctuations
      in petroleum prices;





·
              The
      availability of additional capital to support capital improvements,
      development and projects;





·
            Changes
      in perception of food quality and safety;
and





·
            Other
      factors discussed under the item below entitled “Risk
      Factors.”





We are
not under any duty to update the forward-looking statements contained in this
report. We cannot guarantee future results or performance or what future
business conditions will be like. We caution you not to put undue reliance on
any forward-looking statements, which speak only as of the date of this
report.





PART I





Item
1.   Business.





Overview





South
Dakota Soybean Processors, LLC (“we,” “us,” “our” or the “Company”) owns and
operates a soybean processing plant, a soybean oil refinery, and a bio-based
polyurethane production facility in Volga, South Dakota. We are owned by 2,201
members who principally reside in South Dakota and neighboring
states.





Our core
business consists of processing locally grown soybeans into soybean meal and
soybean oil. Approximately 80% of a bushel of soybeans (60 pounds) is processed
into soybean meal or hulls, and the remaining 20% is extracted as oil. We sell
the soybean meal primarily to resellers, feed mills, and livestock producers as
livestock feed. We market and sell multiple grades of soybean oil –
crude, refined, and a soy-based polyol.  Crude
and refined soybean oil are marketed and sold to the food, biodiesel and
chemical industries.  Our soy-based polyol, Soyol®, and its
resin systems, are sold to the polyurethane industry.  Under certain
market conditions, we may register and deliver warehouse receipts for crude oil
according to the terms and conditions of a CBOT soybean oil futures
contract.









We strive
to maintain a competitive position in the marketplace by producing high quality
products, operating a highly efficient operation at the lowest possible cost,
and adding value to our core products to capture larger margins. We continue to
search for ways to improve our efficiencies by analyzing new methods of vertical
integration, adding value to our products by investing in further processing of
our products, and reviewing new applications for our products in the plastics
and energy fields. While it is our objective to maximize the issuance of cash
distributions to our members from profits generated through operations, we
recognize the need to maintain our financial strength by reinvesting for our
future.





General
Development of Business





We were
originally organized as a South Dakota cooperative in 1993. As a South Dakota
cooperative, we were entitled to single-level, pass-through tax treatment on
income generated through our members’ patronage. This allowed us to pass our
income onto our members in the form of distributions without first paying taxes
at the company level, similar to a partnership. However, as we grew, the
continuing availability of this advantageous tax treatment became less secure.
Accordingly, in 2001 the cooperative’s board of directors approved a plan to
reorganize into a South Dakota limited liability company, which became effective
on July 1, 2002. The transaction was an exchange of interests whereby the
assets and liabilities of the cooperative were transferred for capital units of
the newly formed limited liability company, Soybean Processors, LLC. The capital
units were distributed to our members upon dissolution of the cooperative at a
rate of one capital unit of the limited liability company for each share of
equity stock owned in the cooperative. The distribution of capital units to our
members was registered under the Securities Act of 1933, as amended. For
financial statement purposes, no gain or loss was recorded as a result of the
exchange transaction. Upon completion of the reorganization, the name of the
limited liability company was changed to South Dakota Soybean Processors,
LLC.





We began
producing crude soybean oil, soybean meal and soybean hulls in late 1996. Since
then we have made significant capital improvements and expanded our business to
include the development of vertically integrated product lines and services. In
2002, we completed the construction of a refining facility and began refining
crude soybean oil. In 2003, we became the majority owner and assumed management
control of Urethane Soy Systems Company (USSC), a company to which we sell
refined oil and Soyol®, which,
in turn, sells such products and Soyol®-based
polyurethane products to its customers.  We currently hold a 91.6%
equity interest in USSC.





Industry
Information





The
soybean processing industry converts soybeans into soybean meal, soybean hulls
and soybean oil. A bushel of soybeans typically yields approximately 44 pounds
of meal and 11 pounds of crude oil when processed.  While the meal and
hulls are mostly consumed by animals, food ingredients are the primary end use
for the oil. Crude soybean oil is generally refined for use as salad and cooking
oil, baking and frying fat, and to a more limited extent, for industrial uses.
Increasingly, the sale of soybean oil for human consumption is impacted by the
regulation of trans-fat, an ingredient in soybean oil. In 2006, for example, the
U.S. Food and Drug Administration introduced labeling rules which require
food processors to disclose levels of trans-fatty acids contained in their
products. In addition, various local governments in the U.S. have enacted, or
are considering enacting, restrictions on the use of trans-fats in restaurants.
Because of this, many food manufacturers have reduced the amount of hydrogenated
soybean oil they include in their products or switched to other oils containing
lower amounts of trans-fat.





Soybean
production is concentrated in the central U.S., Brazil, Argentina and China. In
the 2008 harvest season, the U.S. produced approximately 2.96 billion bushels of
soybeans or approximately 35% of estimated world production. The USDA estimates
that approximately 60% of soybeans produced in the U.S. are processed
domestically, 38% are exported as whole soybeans, and 2% are retained for seed
and residual use. Historically, there has been adequate soybean production in
the upper Midwest to supply the local soybean processing industry. In 2008, for
example, farm producers in South Dakota produced 138 million bushels of
soybeans, compared to the top five states which produced the
following:





State
                          
                          Production (bushels)Iowa
                          
                          444
      MillionIllinois
                          
                          427
      MillionMinnesota
                          
                          264
      MillionIndiana
                          
                          244
      MillionNebraska
                          
                          225
      Million





Soybean
processing facilities are generally located close to adequate sources of
soybeans and a strong demand for meal to decrease transportation costs. Poultry
and swine dominate soybean meal consumption in the U.S. On average, exports of
soybean meal account for 15% to 20% of total production.




2





Soybean
oil refineries are generally located close to processing plants. Oil is shipped
throughout the U.S. and for export. Approximately 85% of domestic oil production
is used in food applications and 15% in industrial applications.





Soybean
crushing and refining margins are cyclical, characteristic of a mature,
competitive industry. While the price of soybeans may fluctuate
substantially from year to year, the prices of meal and oil generally track that
of soybeans, although not necessarily on a one-for-one basis; therefore, margins
can be variable.





The
soybean industry continues diligently to introduce soy products as bio-based
substitutes for various petroleum-based products. Such products include
biodiesel, soy ink, lubricants, candles and plastics. Until recently, biodiesel,
a substitute for standard, petroleum-based diesel fuel, experienced steady
growth in the U.S. This growth, however, has slowed down precipitously due to
prevailing market conditions, namely an overcapacity in the industry, price
volatility in the petroleum oil market, and high and volatile input costs such
as refined soybean oil.





Products &
Services





Soybean
Processing





We
process soybeans at our crushing plant to extract the soybean oil from the
protein and fiber portions of the soybean. Approximately 80% of a soybean bushel
is processed and sold as soybean meal or hulls. The remaining percentage of the
soybean is extracted as crude soybean oil.  In addition to crude
soybean oil, we have the capability at our facility in Volga, South Dakota, to
process our crude oil into refined oil and a soy-based polyol.





For
fiscal years ended December 31, 2008, 2007 and 2006, revenue from the sale
of soybean meal, hulls, crude oil, and refined oil was approximately
99.2%, 99.2% and 99.8%, of total revenues, respectively.





Polyurethane





We
produce a bio-based polyol called Soyol® which is
used in industrial applications for the polyurethane
industry.  Soyol® is made
from specially refined crude soybean oil, and is a key chemical compound that,
upon reaction with other ingredients, forms polyurethane plastics.
Soyol® is a
renewable replacement for petrochemical based polyols. Polyurethanes are used in
a variety of products such as insulation in buildings and appliances; seating;
carpet backing and padding; shoe soles; roof coatings; mattresses and pillows;
rigid panels; and bumpers and interiors in cars, tractors and trucks. We sell
Soyol® to USSC
which, in turn, markets and sells to its customers Soyol® and
polyurethane resin systems incorporating Soyol®.  Our
resin systems include a spray-on insulation product called SoyThermTM and a
spray-based coating product for various applications (such as bedliners) called
BioTuffTM.  While our primary marketing focus has been with these spray
applications, we began marketing systems to the original equipment manufacturers
(“OEM”) in the last quarter of 2008.  In addition, Ford Motor Company,
in partnership with Lear Corporation, began incorporating Soyol into the seat
cushions of the Ford Mustang in 2007.





Soyol® and
Soyol®-based
resin systems are relatively new in the market, having undergone significant
research and development in recent years.  We have made progress in
the marketing and sales areas as our revenues from polyurethane sales have
increased five-fold since 2006. For fiscal years ended December 31, 2008,
2007 and 2006, our revenues from the sale of Soyol® and
Soyol® based
resin systems were approximately 0.7%, 0.4%, and 0.2% of total revenues,
respectively.





We have
exclusive rights to supply Soyol® to USSC
until 2014 and have agreed not to sell it to any other company in the plastics
industry.





Raw
Materials and Suppliers





We
procure soybeans from local soybean producers and elevators. In 2008, soybean
production in South Dakota was approximately 138 million bushels, compared to
133.5 million bushels in 2007 and 130.9 million bushels in 2006. Of this amount,
we processed 26.5 million bushels of soybeans in 2008, compared to 26.6 million
bushels in 2007 and 27.8 million bushels in 2006. We control the flow of
soybeans into our facilities with a combination of pricing and contracting
options. Threats to the soybean supply include weather, changes in government
programs, and competition from other processors and export markets. Our refining
plant received the substantial majority of crude soybean oil supply from our
crushing plant.





Utilities





We use
natural gas and electricity to operate the crushing and refining plants. Natural
gas is used in the boilers for processing heat and for drying soybeans.
NorthWestern Corporation of Sioux Falls, South Dakota, provides for the delivery
of natural gas to us on an interruptible basis. We are at risk to adverse price
fluctuations in the natural gas market, but we have the capability to use fuel
oil and biofuel as a back up for natural gas if delivery is interrupted or
market conditions dictate. We also employ forward contracting to offset some of
this risk. Our electricity is supplied by the City of Volga, South
Dakota.




3


Employees





We
currently employ approximately 100 individuals, all but 12 of whom are
full-time. We have no unions or other collective bargaining
agreements.





Sales,
Marketing and Customers





Our
soybean meal is primarily sold to resellers, feed mills, and livestock producers
as livestock feed. Our meal market is local (typically within 200 miles of our
Volga facility), Western U.S., and Canada. Two significant meal customers are
Commodity Specialists Company and Archer Daniels Midland Company (ADM), where
facilities from Minneapolis, Minnesota, and Mankato, Minnesota, respectively,
receive our product. Prior to August 2008, our primary refined oil market was an
ACH Food Companies Inc. facility in Illinois and biodiesel production companies
located throughout the U.S. However, due to a joint venture agreement recently
entered into between ACH and ADM, and as a result of prevailing market
conditions in the biodiesel industry, we anticipate that sales of refined oil
will materially decrease in 2009. Correspondingly with and supplementing the
decrease in refined oil sales, we anticipate that sales of crude oil in 2009
will increase. Typically, we receive a lower price from the sale of crude oil,
but the lower price is generally offset by lower production costs compared to
refined oil. Over half of our products are shipped by rail, the service of which
is provided by the Dakota, Minnesota and Eastern (DM&E) rail line, with
connections to the Burlington-Northern Santa Fe (BNSF) and the Union Pacific
(UP) rail lines. The table presented below represents the percentage of sales by
quantity of product sold within various markets for 2008.




Market
                    
                    Soybean Meal
                    
                    
                    Crude
                      Soybean
                      Oil
                    
                    
                    Refined OilLocal
                    
                    
                    46
                    %
                    
                    
                    14
                    %
                    
                    
                    8
                    %Other
      U.S. States
                    
                    
                    10
                    %
                    
                    
                    84
                    %
                    
                    
                    92
                    %Export
                    
                    
                    44
                    %
                    
                    
                    2
                    %
                    
                    
                    —
                    %





All of
our operations are domiciled in the U.S.  All of the products sold to our
customers for fiscal years 2008, 2007 and 2006 were produced in the U.S., and
all of our long-lived assets are domiciled in the U.S. In addition, 92% of total
revenues in 2008 were derived from sales to customers in the U.S., and 8% was
derived from sales to customers in Canada.





Dependence
upon a Single Customer





Historically,
we have been substantially dependent upon three customers for the purchase of
our soybean meal and refined oil products. With respect to refined oil, we have
sold a majority of our refined soybean oil to ACH Food Companies, Inc.,
under the terms of a supply agreement.  This agreement was terminated
in August 2008 but we continue to make sales to ACH on a bid-like
basis.  Due to a joint venture agreement recently entered into between
ACH and ADM, however, we anticipate that our sales of refined oil to ACH and/or
ADM will decrease materially in 2009, which will cause us to increase our sales
of crude oil.  In addition, we sell a significant amount of our
soybean meal to Commodity Specialists Company and ADM in Minneapolis, Minnesota,
and Mankato, Minnesota, respectively.





Competition





We are in
direct competition with several other soybean processing companies in the U.S.,
many of which have significantly greater resources than we do. The U.S. soybean
processing industry is comprised primarily of 16 different companies operating
64 plants in the U.S. It is a mature, consolidated and vertically-integrated
industry with four companies controlling nearly 84% of the processing industry.
Those four companies are Archer Daniels Midland (ADM), Bunge, Cargill and Ag
Processing (AGP). The U.S. vegetable oil (including soybean oil) refining
industry is divided between oilseed processors and independent vegetable oil
refiners. The oilseed processors operate approximately 83% of the vegetable oil
refining capacity in the U.S., and ADM, Bunge, Cargill and AGP operate
approximately 68% of the oil refining capacity. The three largest independent
vegetable oil refiners are ACH Foods, Smuckers (Proctor & Gamble), and
ConAgra (Hunt-Wesson).





We are
one of two soybean processing plants in South Dakota. The other processing plant
in South Dakota is a start-up company located in Miller, South Dakota,
approximately 100 miles from our facility. This plant commenced crushing
operations in October 2008 and plans to process 4.1 million bushels of soybeans
annually. We believe that our processing facility represents approximately 7% of
the total soybean processing capacity in the upper Midwest and about 1.5% in the
U.S. We plan to maintain our competitive position in the market by
producing high quality products and operating a highly efficient operation at
the lowest possible cost, and adding value to our products. We plan to increase
our cost efficiency by adding value to our products by investing in further
processing of our products, and developing and reviewing new applications for
our products in the plastics and energy fields.




4




According
to the American Chemistry Council’s “2006 End Use Market Survey on the
Polyurethanes Industry,” the primary competitors in soy-based polyols are
Biobased Technology, Dow Chemical Co., and Cargill Inc.  In addition,
USSC faces strong competition from suppliers in the polyurethane NAFTA market,
specifically from BASF, Bayer, Dow Chemical and Huntsman, each of which has
significantly greater resources than we or USSC.





Government
Regulation and Environmental Matters





The
recovery of hexane, a special-use solvent used to extract oil from soybeans, is
closely monitored by the U.S. Environmental Protection Agency. The Environmental
Protection Agency requires that the amount of hexane lost in the extraction
process not exceed 0.2 gallons per ton of soybean oil produced on a rolling
12-month average. Our production process meets this requirement as of this
date.





As
part of a Compliance Plan with the South Dakota Departments of Environment
and Natural Resources, we have a zero process discharge system and are currently
in compliance with our surface water discharge permits. We are also obligated to
provide ongoing compliance reports to the Department of Environment and Natural
Resources. We maintain a spill prevention plan that contains the necessary
procedures to minimize spill events and provide emergency notification, if
necessary. It also contains the required information pertaining to spill
containment procedures in the event a spill does occur, and the proper spill
clean-up procedures. The plan places us in compliance with the provision of 40
CFR, Part 112, of the Federal Regulations on oil pollution prevention, and
the provisions of SARA, Superfund Amendments and
Reauthorization Act, 1986. It also addresses all known potentially
polluting materials at our plant. At this time, we do not generate any known
hazardous wastes at our facility.





Available
Information





Our
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, and amendments to reports filed pursuant to the
Securities Exchange Act of 1934, as amended, are filed with the
SEC.  Such reports and other information filed by us with the SEC are
available on the SEC website (www.sec.gov). The public may read and copy any
materials filed by us with the SEC at the SEC’s Public Reference Room at
100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain
information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports,
proxy, and information statements and other information regarding issuers that
file electronically with the SEC at www.sec.gov. The contents of these websites
are not incorporated into this filing. Our website is at www.sdsbp.com.





Item
1A.   Risk Factors.





Risks
Relating to Operations





Our revenues and
operating results could be adversely affected by changes in commodity
prices.  Our revenues, earnings and cash flows are affected by
market prices for commodities such as crude oil, natural gas, and crude and
refined vegetable oils. Commodity prices generally are affected by a wide range
of factors beyond our control, including weather, disease, insect damage,
drought, the availability and adequacy of supply, government regulation and
policies, and general political and economic conditions. In addition, we are
exposed to the risk of nonperformance by counterparties to contracts. Risk of
nonperformance by counterparties includes the inability to perform because of a
counterparty’s financial condition and also the risk that the counterparty will
refuse to perform a contract during a period of price fluctuations where
contract prices are significantly different than the current market
prices.





A national
economic slowdown and turmoil in the financial markets could adversely affect
our business and operating results.The level of demand for
our products is affected by national economic conditions, particularly as it
relates to the agriculture market.  A significant slowdown in national
growth may lead to reduced demand for agricultural commodities, which could
adversely affect our business and results of operations. Additionally, the
ongoing national financial crisis, deterioration in national economic conditions
and severe tightening in the credit markets may adversely affect the financial
viability of our customers, suppliers and other counterparties, which may
negatively impact our financial condition.





We may find it
more difficult to obtain in 2009 an adequate supply of soybeans at reasonable
prices if the price of soybeans remains low. Since the beginning of the
fourth quarter 2008, the price of commodities has decreased due to various
factors including a slowing national economy, decreases in crude oil prices, and
supply and demand.  As a result of decreased prices, our suppliers of
soybeans may be more reluctant to sell soybeans for our operations, instead
waiting for more attractive prices before selling. The combination of tight
supplies, and potential price volatility in the soybean market, may adversely
affect our margins and, therefore, our results of operations in the
future.




5




Our operating
results could suffer if we are unable to find new customers for our oil.
Our supply agreement with ACH Food Companies, Inc., a customer that
historically has purchased the majority of our refined oil, terminated in
August 2008. While we continue to make sales to ACH, our future
relationship with and sales to ACH is uncertain at this time.  In
January 2009, ACH announced a joint venture agreement with ADM; which we
anticipate will cause a decrease in future sales of refined oil to
ACH.  As a result, we may need to find new customers for our soybean
oil to replace the product sold to ACH. Besides sales to ACH and other companies
in the food industry, we have historically sold our refined oil product to the
biodiesel industry. More recently the biodiesel industry has been adversely
affected by the national economic slowdown, which has made it more difficult for
us to sell our refined oil to this industry. Therefore, we may experience
difficulty selling our oil, or it may be necessary to sell our oil at discounted
prices in the future. Alternatively, in lieu of selling refined oil, we may need
to sell additional crude oil to customers all of which could affect our results
of operations.





Our operating
results could suffer if we are unable to find additional customers for our
soybean meal. Commodity Specialist Corporation and ADM purchase a large
percentage of the soybean meal produced at our facility.  If either of
these companies fail to fulfill the contractual terms to purchase or are not in
the financial position to purchase our products in the future, we would be
forced to seek other arrangements to sell our products. There are no assurances,
however, that any new arrangement would achieve results comparable to those
achieved by these two companies.





Higher than
anticipated operating costs, including but not limited to increased prices for
soybeans, could reduce our profitability. In addition to general market
fluctuations and economic conditions, we could experience significant cost
increases associated with the ongoing operation of our soybean processing and
refining plant or our interest in USSC caused by a variety of factors, many of
which are beyond our control. These cost increases could arise from an
inadequate local supply of soybeans and resulting increased price that is not
accompanied by an increase in the price for soybean oil and
meal.  Labor costs can also increase over time, particularly if there
is any shortage of labor, or shortage of persons with the skills necessary to
operate our facility. Adequacy and cost of electric and natural gas utilities
could also affect our operating costs. Changes in price, operation and
availability of truck and rail transportation may affect our profitability
with respect to the transportation of soybean meal, oil and other products to
our customers.





It may become
more difficult to sell our soybean oil for human
consumption.In 2006, new U.S. Food and Drug Administration
labeling rules took effect which requires food processors to disclose
levels of trans-fatty acids contained in their products. In addition, various
local governments in the U.S. are considering, and some have enacted,
restrictions on the use of trans-fats in restaurants. Several food processors
have either switched or indicated an intention to switch to edible oil products
with lower levels of trans-fatty acids.  Because processing soybean
oil, particularly hydrogenation, creates trans-fat, it may be more difficult to
sell our oil to customers engaged in the food industry which could adversely
affect our revenues and profits.


Hedging
transactions involve risks that could harm our profitability.To reduce
our price change risks associated with holding fixed price commodity positions,
we generally take opposite and offsetting positions by entering into commodity
futures contracts (either a straight futures contract or an options futures
contract) for soybeans, soybean meal and crude soybean oil on the Chicago Board
of Trade. While hedging activities reduce our risk of loss from changing market
values, such activities also limit the gain potential which otherwise could
result from those market fluctuations. Our policy is to maintain hedged
positions within limits, but we can be long or short at any time. In addition,
at any one time, our inventory and purchase contracts for delivery to the plant
may be substantial, which could limit our ability to adjust our hedged
positions. If our risk management policies and procedures that guide our net
position limits are inadequate, we could suffer adverse financial
consequences.




We have made
significant investments in USSC, which has a history of operating losses.We are the majority owner of USSC, a company engaged primarily in
research and development of Soyol® and
Soyol® based
resin systems. To date, USSC has generated limited revenues and significant
losses. If USSC continues to be unprofitable, our operations overall will be
adversely affected, consequently diminishing our earnings and the value of our
investment in USSC. The ability to commercialize Soyol® depends
upon, among other things, the performance of the product as compared to
alternative polyols, successful completion of ongoing development activities,
the ability to market the product, and the relative cost to the customer of
Soyol® as
compared to alternative polyols.  If Soyol® is not
successfully commercialized and fails to achieve market acceptance, USSC will
likely not achieve or sustain profitable operations and we may be required
to abandon or reduce our investment in USSC.





The success of
our ownership in USSC is dependent upon market acceptance of Soyol®.USSC’s
future success, if any, is significantly dependent on the acceptance of
Soyol® in the
markets to which Soyol® is
targeted.  Since the introduction of Soyol® in 1998,
USSC has had limited success in marketing to manufacturers the use of Soyol® as a
replacement for petroleum-based polyols. Common acceptance of USSC’s technology
is dependent upon among other things, the ease of use, reliability, price and
increased consumer demand for bio-based products. Even if the advantages of
Soyol® are
established, we are unable to predict how quickly, if ever, Soyol® will be
generally accepted by manufacturers as a substitute for petroleum-based
polyols.




6




We are dependent
on our management and other key personnel, and loss of their services
may adversely affect our business.Our success and business strategy
is dependent in large part on our ability to attract and retain key
management and operating personnel. This can present particular challenges for
us because we operate in a specialized industry and because our business is
located in a rural area. Such individuals are in high demand and are often
subject to competing employment offers in the agricultural value-added
industries. In particular, our success is dependent on our ability to retain the
services of Mr. Christianson, our CEO, and Mr. Kersting, our
Commercial Manager. The loss of the services of Messrs. Christianson or
Kersting or the failure of such individuals to perform their job functions
in a satisfactory manner would have a material adverse effect on our business
operations and prospects.





Risks
Relating to Industry





We operate in an
intensely competitive industry and we may not be able to continue to
compete effectively.We may not be able to continue to successfully
penetrate the markets for our products. The soybean processing business is
highly competitive, and other companies presently in the market, or that could
enter the market, could adversely affect prices for the products we sell. We
compete with other soybean processors such as Archer-Daniels Midland (ADM),
Cargill, Bunge, and Ag Processing (AGP), among others, all of which are capable
of producing significantly greater quantities of soybean products than we do,
and may achieve higher operating efficiencies and lower costs due to their
scale.  In addition, we compete with companies who use petroleum based
polyols in the polyurethane product manufacturing process, including BASF,
Bayer, Dow Chemical, and Huntsman. We also face competition with companies who
are using soy-based polyol technologies in the polyurethane industry including
Biobased Technology, Dow Chemical, and Cargill. The major companies have longer
operating histories, greater name recognition, larger customer bases and greater
financial, marketing and public relations resources, which may make it difficult
for us to enter the market and become profitable in our sale of Soyol® and
Soyol®-based
resin systems.





The detection and
spread of the Avian Flu virus into the U.S. could adversely affect our sales of
soybean meal.The spread of the Avian Flu virus, otherwise known as the
“bird flu virus,” has adversely affected the poultry industries globally,
particularly in Asia, the Middle East and Europe. In effort to combat the virus,
several countries over the years have exterminated large quantities of poultry,
which has reduced the demand for poultry in these countries. While the virus has
not been detected in the U.S., many experts continue to predict that the virus
will eventually appear. If it does appear, the supply and demand for poultry is
likely to decline in the U.S. Because soybean meal is a major feed product
for the poultry industry, any significant decline in the supply and demand for
poultry in the U.S. could adversely affect the demand for soybean
meal.  As a result of the detection and spread of this virus, our
sales of soybean meal and financial operations could be adversely
affected.





Our profitability
is influenced by the protein and moisture content of the soybeans in the local
growing area.The northern portion of the western soybean belt, where our
plant is located, typically produces a lower protein soybean resulting in a
lower protein soybean meal. Because lower protein soybean meal is sold at a
lower price, we may not be able to operate as profitably as soybean
processing plants in other parts of the country. If adverse weather conditions
further reduce the protein content of the soybeans grown in our area, our
business may be materially harmed because we will be required to sell our
soybean meal at discounted prices to our customers.





In
addition, the moisture content of the soybeans that are delivered to our plant
also influences our profitability and the efficiency of our plant operations.
Soybeans with high moisture content require more energy to dry them before they
can be processed. While we may recover some of these extra energy costs by
paying producers less for high moisture soybeans, these savings may not be
sufficient to offset our additional operating expenses.





Interruptions in
energy supplies could have a material adverse impact on our business.Soybean processing requires a constant and consistent supply of energy.
If there is any interruption in our supply of energy for whatever reason, such
as delivery or mechanical problems, we may be required to halt production.
If production is halted for any extended period of time, it will have a material
adverse effect on our business. If we were to suffer interruptions in our energy
supply, our production would likely fall and the profitability of our business
would be harmed.





Because soybean
processing and refining is energy intensive, our business will be materially
harmed if natural gas and electricity prices increase substantially.Historically,natural
gas prices have fluctuated significantly. Any significant increase in the price
of natural gas or electricity will increase our energy costs and therefore harm
our business.




7




Transportation
costs are a factor in the price of soybean oil and meal and increased
transportation costs could adversely affect our profitability. Soybean
oil may be shipped by trucks, rail cars, and barges. Added transportation
costs are a significant factor in the price of soybean oil, and we may be
more vulnerable to increases in transportation costs than other producers
because our location in Volga is more remote than that of most of our
competitors. Today, most of our products are sold FOB Volga, South Dakota, and
those that are not have the full transportation cost added to the contract.
Transportation costs do not currently affect our margin directly; however, the
added costs could eventually affect demand for our products.





Increases in the
production of soybean meal or oil could result in lower prices for soybean
meal or oil and have other adverse effects.Existing soybean processing
and refining plants could construct additions to increase their production and
new soybean processing and refining plants could be constructed as well. If
there is not a corresponding increase in the demand for soybean meal and oil or
if the increased demand is not significant, the increased production of soybean
meal and oil may lead to lower prices for soybean meal and oil. The
increased production of soybean meal and oil could have other adverse effects as
well. For example, the increased production of soybean meal and oil could result
in increased demand for soybeans which could in turn lead to higher prices for
soybeans, resulting in higher costs of production and lower profits if we are
not able to lock in satisfactory margins on future soybean purchases and soybean
meal and oil sales.





Risks
Relating to Legal and Regulatory Risks





Legislative,
legal or regulatory developments could adversely affect our profitability.The regulation of the environment is a constantly changing area of the
law, and we are regulated by numerous federal and state environmental
rules or regulations. For example, the Environmental Protection Agency
currently requires monitoring of unrecovered levels of chemical hexane, which is
used in our oil extraction process. If the standard is revised to require lower
loss levels or for some reason we are unable to meet the standard in the future,
we could face fines or other consequences that could increase our operating
costs and reduce profits. It is possible that changes to other federal or state
environmental rules or regulations could be adopted that would increase our
operating costs and expenses or require additional capital
investment.





Although
our production of soybean meal and oil is not directly regulated by the
Food & Drug Administration, we must comply with the FDA’s content and
labeling requirements, which are monitored at our customers’ facilities. Failure
to comply with these requirements could result in fines, liability to our
customers or other consequences that could increase our operating costs and
reduce profits. In addition, changes to the FDA’s rules or regulations
could be adopted that would increase our operating costs and expenses, or
require capital investment.





We could face
increased operating costs if we were required to segregate genetically modified
soybeans and the products generated from these soybeans.In the last
several years, some soybean producers in our area have been planting genetically
modified soybeans, commonly known as Round-up Ready beans. Neither the U.S.
Department of Agriculture nor the FDA currently requires that genetically
modified soybeans be segregated from other soybeans. If these agencies or our
customers were to require that we process these genetically modified soybeans
separately, we would face increased storage and processing costs and our
profitability could be harmed





Item
      2.
            Properties.





We
conduct our operations principally at our facility in Volga, South Dakota. We
own the land, consisting of 47 acres, on which all of the infrastructure and
physical properties rest. Our facilities consist of a soybean processing plant,
a soybean oil refinery, a bio-based polyurethane production facility, a quality
control laboratory, and administrative and operations buildings.





All of
our tangible property, real and personal, serves as collateral for our debt
instruments with our primary lender, CoBank, ACB, of Greenwood Village,
Colorado, which is described below under “Item 7—Management’s Discussion
and Analysis of Financial Condition and Results of
Operation—Indebtedness.”





Item
      3.
            Legal
      Proceedings.





From time
to time in the ordinary course of our business, we may be named as a defendant
in legal proceedings related to various issues, including without limitation,
workers’ compensation claims, tort claims, or contractual disputes. We carry
insurance that provides protection against general commercial liability claims,
claims against our directors, officers and employees, business interruption,
automobile liability, and workers’ compensation claims. Except as described
below, we are not currently involved in any material legal proceedings and are
not aware of any potential claims.





8




On
January 31, 2007, we were named as a defendant in a lawsuit filed in the
U.S. District Court for the District of Minnesota, along with other individual
defendants, including our chief executive officer, Rodney Christianson,
commercial manager, Tom Kersting, and Board member, Dan Feige, and former board
member, Rodney Skalbeck. The plaintiffs, Transocean Group Holdings PTY Ltd. and
Transocean Global Biofuels PTY Ltd., of Sydney, Australia (“Transocean”), allege
that we breached a heads of agreement with Transocean dated April 28,
2006.  The heads of agreement concerned the potential development and
operation of a biodiesel refinery through a company called High Plains
Biofuels, Inc., to be owned by us and Transocean as shareholders.
Transocean alleges that the individual defendants breached fiduciary duties to
High Plains Biofuels. Transocean is currently seeking restitution damages, the
value of which is uncertain and disputed at this time.  Based upon our
investigation of the facts surrounding the case, we believe that Transocean’s
allegations are meritless, and we are vigorously defending the action. We filed
answers to Transocean’s complaint on September 17, 2007 and amended complaint on
February 7, 2008. We also filed a motion for summary judgment on January 15,
2009, and oral arguments are scheduled for May 20, 2009.  We cannot
provide, however, any assurance that we will be successful in disposing of the
case or that any costs of settlement or damages would not be material if we are
unable to get the case dismissed.





Item
      4.
            Submission
      of Matters to a Vote of Security
Holders.





There
were no matters submitted to a vote of security holders in the fourth quarter
ending December 31, 2008.





Part II





Item
      5.
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities.





As of
March 1, 2009, the total number of capital units outstanding is 30,419,000,
all of which is owned and held by 2,201 members.





Trading
Activity





Our
capital units are not traded on an established trading market such as a stock
exchange or The NASDAQ Stock Market.  Rather, our capital units are traded
on a “qualified matching service” as defined by the publicly-traded partnership
rules of the federal tax code. Under the qualified matching service,
interested buyers and sellers of our capital units are matched on the basis of
rules and conditions set forth by the federal tax code, and all trades are
subject to final approval by our board of managers. Our qualified matching
service is operated through Variable Investment Advisors, Inc., of Sioux
Falls, South Dakota, a registered broker-dealer operating a registered
Alternative Trading System with the SEC.  The following table contains
historical information by quarter for the past two years regarding the trading
of capital units through the qualified matching service:




Quarter
                  
                  Low Price
                    (1)
                  
                  
                  High Price
                    (1)
                  
                  
                  Average
                    Price
                  
                  
                  # of
                    Capital
                    Units TradedFirst
      Quarter 2007
                  
                  $
                  1.45
                  
                  
                  $
                  1.50
                  
                  
                  $
                  1.47
                  
                  
                  
                  120,000Second
      Quarter 2007
                  
                  $
                  1.40
                  
                  
                  $
                  1.60
                  
                  
                  $
                  1.52
                  
                  
                  
                  70,500Third
      Quarter 2007
                  
                  $
                  1.25
                  
                  
                  $
                  1.40
                  
                  
                  $
                  1.33
                  
                  
                  
                  39,000Fourth
      Quarter 2007
                  
                  $
                  1.16
                  
                  
                  $
                  1.35
                  
                  
                  $
                  1.25
                  
                  
                  
                  51,500First
      Quarter 2008
                  
                  $
                  1.30
                  
                  
                  $
                  1.40
                  
                  
                  $
                  1.38
                  
                  
                  
                  151,000Second
      Quarter 2008
                  
                  $
                  1.28
                  
                  
                  $
                  1.35
                  
                  
                  $
                  1.32
                  
                  
                  
                  47,250Third
      Quarter 2008
                  
                  $
                  1.20
                  
                  
                  $
                  1.26
                  
                  
                  $
                  1.22
                  
                  
                  
                  52,000Fourth
      Quarter 2008
                  
                  $
                  0.95
                  
                  
                  $
                  1.10
                  
                  
                  $
                  0.97
                  
                  
                  
                  8,750








(1)
            The
      rules under our qualified matching service prohibit firm bids;
      therefore, the prices reflect actual sales.





There
were no issuer purchases of equity securities during the fourth quarter ending
December 31, 2008.





Trading
and Transfer Restrictions





As a
limited liability company, we must strictly restrict transfers of our capital
units in order to preserve our preferential single-level tax status at the
member level. To preserve this, our operating agreement prohibits transfers
other than through the procedures specified under our capital units transfer
system, which may be amended from time to time by our board of managers. Under
this system, our capital units cannot be traded on any national securities
exchange or in any over-the-counter market. Also, we do not permit the number of
capital units traded through the qualified matching service on an annual basis
to exceed 10% of our total issued and outstanding capital units. All
transactions also must be approved by the board, which are generally approved if
they fall within “safe harbors” contained in the rules of the federal tax
code. Permitted transfers include transfers by gift or death, sales to qualified
family members, and trades through the qualified matching service subject to the
10% restriction. Pursuant to our operating agreement, a minimum of 2,500 capital
units is required to be owned by an individual for membership, and no member
may own more than 1.5% of our total outstanding capital units.




9


Distributions





In 2007,
we paid a cash distribution to our members of $6.4 million (approximately 21.0¢
per capital unit). In 2008, we paid a cash distribution of approximately $3.8
million.  In accordance with our operating agreement and distribution
policy, the distributions were issued to our members as well as to eligible
persons of our predecessor cooperative who were subject to patronage retainage
through written notices of allocation.





Our
distributions are declared at the discretion of our board of managers and are
issued in accordance with the terms of our operating agreement. In addition,
distributions are subject to restrictions imposed under our loan agreement with
our lender. There is no assurance as to if, when, or how much we will make in
distributions in the future. Actual distributions depend upon our profitability,
expenses and other factors discussed in this report.





Item
      6.
            Selected
      Financial Data.





The
following table sets forth selected financial data of South Dakota Soybean
Processors, LLC for the periods indicated. The financial statements for the year
ended December 31, 2008 included in Item 8 of this report were audited by Eide
Bailly LLP.  The financial statements for the years ended December 31,
2007 and 2006 included in Item 8 of this report were audited by Gordon,
Hughes & Banks, LLP.





2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Bushels
      Processed
                
                
                26,470,827
                
                
                
                26,649,061
                
                
                
                27,775,724
                
                
                
                28,003,640
                
                
                
                26,823,093Statement
      of Operations Data:Revenues
                
                $
                360,114,676
                
                
                $
                247,741,767
                
                
                $
                212,721,926
                
                
                $
                210,370,966
                
                
                $
                238,211,056Costs &
      Expenses:Cost
      of goods sold
                
                
                (350,920,031
                )
                
                
                (240,701,417
                )
                
                
                (203,525,766
                )
                
                
                (209,992,802
                )
                
                
                (232,703,866
                )Marketing &
      Admin Expense
                
                
                (6,041,727
                )
                
                
                (3,938,405
                )
                
                
                (3,487,773
                )
                
                
                (3,826,823
                )
                
                
                (4,476,511
                )Operating
      Profit (Loss)
                
                
                3,152,918
                
                
                
                3,101,945
                
                
                
                5,708,387
                
                
                
                (3,448,659
                )
                
                
                1,030,679Non-Operating
      Income
                
                
                2,664,524
                
                
                
                3,157,147
                
                
                
                2,574,350
                
                
                
                840,489
                
                
                
                408,022Interest
      Expense
                
                
                (2,331,105
                )
                
                
                (2,105,676
                )
                
                
                (629,070
                )
                
                
                (1,400,403
                )
                
                
                (1,425,849
                )Income
      Tax Expense
                
                
                (300
                )
                
                
                7,160
                
                
                
                (2,308
                )
                
                
                —
                
                
                
                (1,032
                )Minority
      Interest in Loss of Subsidiary
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                368,403
                
                
                
                676,792Net
      Income (Loss)
                
                $
                3,486,037
                
                
                $
                4,160,576
                
                
                $
                7,651,359
                
                
                $
                (3,640,170
                )
                
                $
                688,612Weighted
      Average Capital Units Outstanding
                
                
                30,419,000
                
                
                
                30,419,000
                
                
                
                30,419,000
                
                
                
                29,758,885
                
                
                
                28,250,139Net
      Income (Loss) per Capital Unit
                
                $
                0.115
                
                
                $
                0.137
                
                
                $
                0.252
                
                
                $
                (0.122
                )
                
                $
                0.024Balance
      Sheet Data:Working
      Capital
                
                $
                10,364,338
                
                
                $
                11,624,347
                
                
                $
                11,951,704
                
                
                $
                5,599,709
                
                
                $
                (2,865,135
                )Net
      Property, Plant & Equipment
                
                
                23,305,443
                
                
                
                24,267,041
                
                
                
                25,526,402
                
                
                
                27,756,941
                
                
                
                30,130,219Total
      Assets
                
                
                79,265,714
                
                
                
                102,362,137
                
                
                
                82,070,372
                
                
                
                73,630,296
                
                
                
                72,499,888Long-Term
      Obligations
                
                
                9,407,405
                
                
                
                12,022,549
                
                
                
                12,007,955
                
                
                
                14,712,635
                
                
                
                9,115,496Members’
      Equity
                
                
                38,107,808
                
                
                
                38,383,991
                
                
                
                40,409,808
                
                
                
                32,768,497
                
                
                
                32,122,573Other
      Data:Capital
      Expenditures
                
                $
                1,121,806
                
                
                $
                1,002,652
                
                
                $
                660,397
                
                
                $
                600,739
                
                
                $
                1,209,852





Item 7.
            Management’s Discussion and
      Analysis of Financial Condition and Results of
      Operations.





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




10




Overview
and Executive Summary




Our core
business and primary source of income generation is our soybean processing plant
located in Volga, South Dakota. We process approximately 27 million bushels of
soybeans annually to produce approximately 680 tons of high protein soybean meal
and 310 million pounds of crude soybean oil. Our production represents
approximately 1.5% of the total soybean processing capacity in the United
States. In addition to our processing plant, we operate a soybean oil refinery
in Volga where we produce partially refined soybean oil. The partially refined
soybean oil is sold to customers in the food, chemical and industrial sectors.
Under certain market conditions we may issue warehouse receipts for crude oil
according to the terms and conditions of the CBOT soybean oil
contract.  Other activities that generate income are our investment in
Minnesota Soybean Processors (MnSP), Brewster, Minnesota, and management and
consulting agreements.





Soybean
processing is basically a commodity driven business and is cyclical in nature.
Our industry is dependent on the annual soybean crop production (supply side)
and world economic growth (demand side for food). Soybean processing is also a
highly consolidated industry with four companies in the U.S. controlling 84% of
the soybean processing industry and 68% of the soybean oil refining capacity for
food applications. We compete in this industry by producing high quality
products and operating a highly efficient operation at the lowest possible
cost.





In
efforts to increase the value of the products we produce, we continue to invest
in our subsidiary, USSC, for the research, marketing and development of
soy-based polyol and soy-based polyurethane systems. USSC’s technical staff and
research lab facilities are located in Volga. USSC’s marketing focus in 2008
included the spray applications for insulation, auto industry, carpet rebound
and padding, and polyurethane system houses. Ford Motor and Lear Corporation
launched in the 2008 Ford Mustang the first soy-based seating in the auto
industry with USSC’s Soyol®. In the
fourth quarter of 2008, USSC reorganized its sales staff to concentrate its
sales of soy-based polyurethane systems to the original equipment manufacturer
market.




We
generated a net profit of $3.5 million for 2008 compared to a profit of $4.2
million for the same period in 2007, a decrease of $0.7 million, or $0.024 per
bushel processed.  We attribute the decrease to an increase in operating,
administrative and interest expenses from 2007 to 2008.





We
anticipate in 2009 a lower than average profit compared to past years. Factors
contributing to this include reduced demand for our products due to declining
world economic activity, future uncertainty in the biofuels industry, the global
financial crisis in the financial markets, and continued investment in USSC to
cover expenses.  Another key contributing factor is higher soybean
prices caused by reduced supply. Higher soybean and commodity prices in general
are expected in 2009 because of a 40-50% drop in commodity prices since the
summer of 2008, which has caused and is causing our soybean suppliers to become
reluctant sellers to us. Moreover, the USDA is projecting a low soybean carryout
for 2008-2009 at 200 million bushels. Tight supplies, combined with a return of
price volatility in the soybean and petroleum markets, could make for a
difficult year in 2009, particularly the first four months. An effective use of
risk management and operating prudently will be our best tools for handling
these challenges.





Results
of Operations




Comparison
of Years Ended December 31, 2008 and 2007





Year Ended December 31, 2008
                        
                        
                        Year Ended December 31, 2007$
                        
                        
                        % of
                          Revenue
                        
                        
                        
                        $
                        
                        
                        % of
                          RevenueRevenue
                        
                        $
                        360,114,676
                        
                        
                        
                        100.0
                        
                        
                        $
                        247,741,767
                        
                        
                        
                        100.0Cost
      of revenues
                        
                        
                        (350,920,031
                        )
                        
                        
                        (97.4
                        )
                        
                        
                        (240,701,417
                        )
                        
                        
                        (97.1
                        )Operating
      expenses
                        
                        
                        (6,041,727
                        )
                        
                        
                        (1.7
                        )
                        
                        
                        (3,938,405
                        )
                        
                        
                        (1.6
                        )Other
      income (expense)
                        
                        
                        333,419
                        
                        
                        
                        0.1
                        
                        
                        
                        1,051,471
                        
                        
                        
                        0.4Income
      tax expense
                        
                        
                        (300
                        )
                        
                        
                        0.0
                        
                        
                        
                        7,160
                        
                        
                        
                        0.0Net
      income (loss)
                        
                        $
                        3,486,037
                        
                        
                        
                        1.0
                        
                        
                        $
                        4,160,576
                        
                        
                        
                        1.7




11




Revenue – Revenue increased
$112.4 million, or 45.4%, for the year ended December 31, 2008 compared to the
same period in 2007.  The increase in revenues is primarily due to
increases in the average sales price of soybean meal and oil.  The
average sales prices of soybean meal and oil increased 47.3% and 51.9% in 2008
compared to 2007, respectively.  The principal cause for this increase
is an increase in the price of crude petroleum oil and its refined products,
which has become the primary driving factor of soymeal and oil prices over the
last couple years.  The increase in revenue is partially offset by a
0.7% decrease in the volume of soybeans crushed, which resulted in a decrease in
sales volume of soybean meal.




Gross Profit/Loss – For the
year ended December 31, 2008, we generated a gross profit of $9.2 million
compared to $7.0 million for the year ended December 31, 2007.  The
$2.2 million increase in gross profit is primarily attributed to higher crush
margins.  This increase in gross profit is partially offset by a $2.0
million increase in production costs.  Of the production costs,
approximately 48% is due to increased energy costs, 25% to increased personnel
costs and 23% to increased maintenance costs.




Administrative Expense –
Administrative expense, including all selling, general and administrative
expenses, increased $2.1 million, or 53.4%, for the year ended December 31, 2008
compared to 2007.  Approximately 40% of this increase is due to
increased legal fees, 32% to the termination of our management agreement with
MnSP, and 17% to an increase in our marketing efforts associated with
USSC.




Interest Expense – Interest
expense increased by $225,000, or 10.7%, during 2008 compared to the same period
in 2007.  This increase is due to higher debt levels resulting from
elevated soybean prices and higher accounts receivable due to the elevated
prices of our soy-based products.  The average debt level during the
year ended December 31, 2008 is approximately $33.9 million, compared to an
average debt level of approximately $25.5 million during the same period in
2007. The increase in interest expense due to higher debt levels is partially
offset by lower interest rates on our senior debt, where the annual interest
rate is 3.50% and 6.75% as of December 31, 2008 and 2007,
respectively.




Other Non-Operating Income –
Other non-operating income decreased by $692,000, or 22.3%, for the year ended
December 31, 2008 compared to the same period in 2007.  The decrease
is primarily due to a decrease in earnings from our investment in
MnSP.  Upon the termination of our services and management agreement
with MnSP, we ceased using the equity method to account for our
investment.  Therefore, we only recognized $46,000 (Class B Preferred
dividends) in earnings from our investment in MnSP for 2008, compared to
recognizing approximately $623,000 in earnings in the same period of
2007.




Net Income/Loss – The
$675,000 decrease in net income during the year ended December 31, 2008 compared
to 2007, is primarily attributable to an increase in administrative and interest
expenses, offset in part by higher crush margins.




Comparison
of Years Ended December 31, 2007 and 2006





Year Ended December 31, 2007
                    
                    
                    Year Ended December 31, 2006$
                    
                    
                    % of
                      Revenue
                    
                    
                    
                    $
                    
                    
                    % of
                      RevenueRevenue
                    
                    $
                    247,741,767
                    
                    
                    
                    100.0
                    
                    
                    $
                    212,721,926
                    
                    
                    
                    100.0Cost
      of revenues
                    
                    
                    (240,701,417
                    )
                    
                    
                    (97.1
                    )
                    
                    
                    (203,525,766
                    )
                    
                    
                    (95.7
                    )Operating
      expenses
                    
                    
                    (3,938,405
                    )
                    
                    
                    (1.6
                    )
                    
                    
                    (3,487,773
                    )
                    
                    
                    (1.6
                    )Other
      income (expense)
                    
                    
                    1,051,471
                    
                    
                    
                    0.4
                    
                    
                    
                    1,945,280
                    
                    
                    
                    0.9Income
      tax expense
                    
                    
                    7,160
                    
                    
                    
                    0.0
                    
                    
                    
                    (2,308
                    )
                    
                    
                    0.0Net
      income (loss)
                    
                    $
                    4,160,576
                    
                    
                    
                    1.7
                    
                    
                    $
                    7,651,359
                    
                    
                    
                    3.6




Revenue – Revenue increased
$35.0 million, or 16.5%, for the year ended December 31, 2007 compared to the
same period in 2006.  The increase in revenues is primarily due to
increases in the average sales price of soybean meal and oil.  The
average sales price of soybean meal and oil increased 25.2% and 37.8%,
respectively, from 2006 to 2007. The principal cause for this increase is the
increase in the price of crude petroleum oil and its refined
products.  The increase in revenues is partially offset by a 4.1%
reduction in the amount of soybeans crushed compared to 2006, which resulted in
a decrease in sales volume.




Gross Profit/Loss – For the
year ended December 31, 2007, we generated a gross profit of $7.0 million
compared to $9.2 million for the year ended December 31, 2006.  The
decrease in gross profit is attributed to a reduction of approximately 1.1
million in bushels processed and slightly lower crush margins in 2007 compared
to 2006.




Administrative Expense –
Administrative expense, including all selling, general and administrative
expenses, increased $451,000, or 12.9%, for the year ended December 31, 2007
compared to 2006.  This increase is due to the termination of a
cost-sharing management agreement and relationship with MnSP on September 1,
2007.




12




Interest Expense – Interest
expense increased by $1.5 million, or 234.7%, during 2007 compared to the same
period in 2006.  The increase is due to higher debt levels resulting
from elevated soybean prices, an increase in the quantity of inventory and
member distributions, and higher accounts receivable due to elevated soy-based
product prices.  Our outstanding debt on December 31, 2007 is $37.5
million, compared to $12.9 million on December 31, 2006.  This
increase is partially offset by lower interest rates on our senior
debt.




Other Non-Operating Income –
Other non-operating income increased by $682,000, or 28.1%, for the year ended
December 31, 2007 compared to the same period in 2006.  The increase
was primarily due to a $775,000 increase in oil storage income, offset partially
by a $99,000 decrease in earnings on our investment in MnSP.  Prior to
the termination of the services and management agreement with MnSP on September
1, 2007, we accounted for our investment in MnSP using the equity
method.  Under the equity method, our investment was adjusted annually
to recognize our share of the earnings and losses of MnSP.  But upon
the termination of our services and management agreement with MnSP, we ceased
using the equity method and thus made no earnings adjustment for the last four
months of 2007.




Net Income/Loss – The $3.5
million decrease in net income during the year ended December 31, 2007 compared
to 2006, is primarily attributable to, a decrease in gross profit and an
increase in interest expense, offset by an increase in other non-operating
income.




Liquidity
and Capital Resources




Our
primary sources of liquidity are cash provided by operations and borrowings
under our two lines of credit which are discussed below under “Indebtedness”. On
December 31, 2008, we had working capital, defined as current assets less
current liabilities, of approximately $10.4 million and a current ratio, defined
as current assets divided by current liabilities of 1.3 to 1, compared to
working capital of $11.6 million and a current ratio of 1.2 to 1 on
December 31, 2007.




Comparison
of the years ended December 31, 2008 and 2007





2008
                  
                  
                  2007Net
      cash from (used for) operating activities
                  
                  $
                  30,670,314
                  
                  
                  $
                  (23,204,972
                  )Net
      cash from (used for) investing activities
                  
                  
                  (413,746
                  )
                  
                  
                  (1,067,681
                  )Net
      cash from (used for) financing activities
                  
                  
                  (30,256,483
                  )
                  
                  
                  15,965,134




Cash Flows from Operating
Activities




Cash
flows from operations are generally affected by commodity prices and the
seasonality of our business. These commodity prices are affected by a wide range
of factors beyond our control, including weather, crop conditions, drought, the
availability and the adequacy of supply and transportation, government
regulations and policies, world events, and general political and economic
conditions.




The
increase in cash flows used for operating activities is primarily attributed to
a net decrease in operating assets and liabilities during the year ended
December 31, 2008 compared to the same period in 2007.  The decrease
in net operating assets and liabilities is caused by a decrease in commodity
prices which generated a decrease in inventories, accounts receivable and margin
deposits, as well as increase in accrued commodity purchases on December 31,
2008 compared to December 31, 2007.




Cash Flows from Investing
Activity




The
decrease in cash used for investing activities between 2008 and 2007 is
primarily attributed to our receipt of $420,000 in unit retains from our
investment in MnSP and approximately $377,000 from the retirement of patronage
dividends by CHS, Inc.  In May 2006 we were required to make a unit
retain investment in MnSP of approximately $420,000 after MnSP’s members voted
to require members to invest $0.30 per share of Class A preferred stock. In
January 2008, MnSP repaid these unit retains to us and other
members.




Cash Flows from Financing
Activity




The
decrease in cash flows from financing activities between the years ended
December 31, 2008 and 2007 is principally due to a $52.8 million decrease in
seasonal and long-term borrowings from 2007 to 2008, partially offset by a $2.6
million decrease in distributions paid to members. During 2008, we distributed
approximately $3.8 million to our members, compared to a distribution of $6.4
million in 2007 which was our largest in history.




We
anticipate in the next 12 months having sufficient cash flows from operating
activities and our revolving debt to fund working capital, to cover operating,
administrative, and capital expenditures, and to meet debt service
obligations.




13





Comparison
of the years ended December 31, 2007 and 2006





2007
                  
                  
                  2006Net
      cash from (used for) operating activities
                  
                  $
                  (23,204,972
                  )
                  
                  $
                  8,685,354Net
      cash from (used for) investing activities
                  
                  
                  (1,067,681
                  )
                  
                  
                  (1,170,221
                  )Net
      cash from (used for) financing activities
                  
                  
                  15,965,134
                  
                  
                  
                  726,077




Cash Flows from Operating
Activities




The
decrease in net cash flow from operating activities between 2007 and 2006 is
primarily attributed to increases in inventories, accounts receivable and margin
deposits and a decrease in net income.  During 2007, higher commodity
prices resulted in increases to inventories (116%), accounts receivable (51%),
and margin deposits (364%).




Cash Flows from Investing
Activity




The
decrease in cash used for investing activities between 2007 and 2006 is
primarily attributed to a decrease in the purchase of investments.  In
May 2006, unlike in 2007, we were required to make a unit retain investment in
MnSP of approximately $420,000 after MnSP’s members voted to require members to
invest $0.30 per share of Class A preferred stock.  The decrease in
investing activities is slightly offset by an increase of $342,000 in purchases
of property and equipment for our facilities.




Cash Flows from Financing
Activity




The
increase in net cash provided by financing activities is principally due to a
$24.7 (net of principal payments) increase in debt in 2007, offset by $6.4
million in distributions to members.  During the year ended December
31, 2007, we used the $24.7 million in proceeds from long-term debt and seasonal
borrowings (net of principal payments) to finance an increase in inventory,
accounts receivable, and margin deposits, and distribute $6.4 million to our
members.




Indebtedness




We have
two lines of credit with CoBank, our primary lender, to meet the short and
long-term needs of our operations. The first credit line is a revolving
long-term loan. Under the terms of this loan, we may borrow funds as needed up
to the credit line maximum, or $11.9 million, and then pay down the principal
whenever excess cash is available.  Repaid amounts may be borrowed up
to the available credit line. Prior to an amendment of our Master Loan Agreement
with CoBank dated March 24, 2009 (see below), the available credit line was
scheduled to be reduced by $1.3 million every six months until maturity on March
20, 2013, except the reduction was waived by CoBank for September 2007 and March
2008.  Beginning in September 2008, the reduction continued and
payments are required if our principal balance outstanding exceeds our then
available credit line.  The final payment at maturity will be equal to
the remaining unpaid principal balance of the loan. We pay a 0.50% annual
commitment fee on any funds not borrowed.  The principal balance
outstanding on the revolving term loan is $9.9 million and $13.2 million as of
December 31, 2008 and 2007, respectively.  The remaining commitment
available to borrow on the revolving term loan is $2.0 million as of December
31, 2008.




The
second credit line is a revolving working capital loan that matures on February
1, 2010.  The primary purpose of this loan is to finance inventory and
receivables. The maximum available under this credit line is $40
million.  Borrowing base reports and financial statements are required
monthly to justify the balance borrowed on this line.  We pay a 0.25%
annual commitment fee on any funds not borrowed; however, we have the option to
reduce the credit line during any given commitment period listed in the
agreement to avoid the commitment fee.  The principal balance on the
working capital loan is approximately $0 and $23.4 million as of December 31,
2008 and 2007, respectively.




Both
CoBank loans are set up with a variable rate option. The variable rate is set by
CoBank and changes weekly on the first business day of each week. We also have a
fixed rate option on both loans allowing us to fix rates for any period between
one day and the entire commitment period. The annual interest rate on both the
revolving term and working capital loans is 3.50% and 6.75% as of December 31,
2008 and 2007, respectively.  Both CoBank loans are secured by
substantially all of our assets and are subject to compliance with standard
financial covenants and the maintenance of certain financial
ratios.  We were in compliance with all covenants and conditions with
CoBank as of December 31, 2008 and as of the date of this filing.




On March
23, 2009 we amended our Master Loan Agreement with CoBank.  Under this
amendment, CoBank agreed to waive the $1.3 million semi-annual credit line
reduction on our revolving term loan scheduled for March 20, 2009, thus
extending the maturity of the revolving term loan from March 20, 2013 to
September 30, 2013   In addition, CoBank modified two financial
covenants – one regarding our minimum working capital requirement and the other
regarding the payment of distributions to our members. While the loan agreement
with CoBank is in effect, we may not declare or issue distributions to members
in excess of 50% of our consolidated net income of the prior fiscal year without
prior written consent from CoBank.




14




We also
have other long-term contracts and notes totaling approximately $250,000, with a
weighted average annual interest rate of 15.0% as of December 31, 2008. We made
principal payments of $895,000 and $77,000 on these additional long-term
obligations during 2008 and 2007, respectively.




We had
expected in 2007 that our indebtedness would increase in the fourth quarter of
2008, but our decision in 2008 to forgo making improvements to the railway
infrastructure near our facility has changed this result. On March 6, 2007, we
became a guarantor of a $1.81 million loan between State of South Dakota
Department of Transportation and the Brookings County (South Dakota) Regional
Railway Authority. The State of South Dakota Department of Transportation agreed
to loan the Brookings County Regional Railroad Authority a total sum of $1.81
million for purposes of making improvements to the railway infrastructure near
our facility. In consideration of the loan, we agreed to guarantee to the State
of South Dakota Department of Transportation the full loan amount, plus
interest, as well as assume the payment obligations under the loan starting in
October 2008. However, after not commencing construction on the improvements by
November 1, 2008, both our obligations under the guaranty and payment under the
loan were terminated.




Capital
Expenditures




We
invested approximately $1.1 million in capital expenditures for property and
equipment during the year ended December 31, 2008, compared to approximately
$1.0 in capital expenditures during the year ended December 31,
2007.  Depending on our profitability in 2009, we anticipate spending
between $1.0 million and $2.0 million on capital expenditures during the year
ended December 31, 2009 to enhance the quality and efficiency of our soybean
crushing facility.  Our principal sources of funds are anticipated to
be cash flows from operating activities and borrowings under our revolving and
working capital loans with CoBank.




Off
Balance Sheet Financing Arrangements





Except as
described below, we do not utilize variable interest entities or other
off-balance sheet financial arrangements.





Lease
Commitments





We have
commitments under various operating leases for rail cars, various types of
vehicles, and lab and office equipment.  Our most significant lease
commitments are the rail car leases we use to distribute our products.  We
have a number of long-term leases with GE Capital, Trinity Capital, and AIG Rail
Services for hopper rail cars and oil tank cars. Total lease expenses under
these arrangements are approximately $2.0 million for each of the years ended
December 31, 2008 and 2007. The hopper rail cars earn mileage credit from
the railroad through a sublease program, which totaled $1.5 million for each of
the years ended December 31, 2008 and 2007.





In
addition to rail car leases, we have several operating leases for various
equipment and storage facilities. Total lease expense under these arrangements
is $700,000 and $497,000 for the years ended December 31, 2008 and 2007,
respectively. Some of our leases include purchase options, none of which however
are for a value less than fair market value at the end of the
lease.




Contractual
Obligations





The
following table shows our contractual obligations for the periods
presented:





Payment due by periodCONTRACTUAL
                                OBLIGATIONS
                              
                              Total
                              
                              
                              Less than
                                1 year
                              
                              
                              1-3 years
                              
                              
                              3-5 years
                              
                              
                              More than 5
                                yearsLong-Term
      DebtObligations
      (1)
                              
                              $
                              10,119,017
                              
                              
                              $
                              819,017
                              
                              
                              $
                              5,200,000
                              
                              
                              $
                              4,100,000
                              
                              
                              $
                              —Operating
      LeaseObligations
                              
                              
                              17,696,110
                              
                              
                              
                              2,141,271
                              
                              
                              
                              4,212,687
                              
                              
                              
                              4,097,790
                              
                              
                              
                              7,244,362Other
      Long-TermLiabilities
      (2)
                              
                              
                              107,405
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              107,405Total
                              
                              $
                              27,922,532
                              
                              
                              $
                              2,960,288
                              
                              
                              $
                              9,412,687
                              
                              
                              $
                              8,197,790
                              
                              
                              $
                              7,351,767




15


(1) Represents
principal payments under our notes payable, which are included on our
Consolidated Balance Sheet.


(2) Represents
obligations under our deferred compensation program, which are included on our
Consolidated Balance Sheet.





Recent
Accounting Pronouncements





In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 141(R), Business Combinations (“SFAS
141(R)”).  SFAS 141(R) expands the definition of transactions and
events that qualify as business combinations; requires that the acquired assets
and liabilities, including contingencies, be recorded at the fair value
determined on the acquisition date and changes thereafter reflected in revenue,
not goodwill; changes the recognition timing for restructuring costs; and
requires acquisition costs to be expensed as incurred. Adoption of SFAS
141(R) is required for combinations after December 15, 2008. Early
adoption and retroactive application of SFAS 141(R) to fiscal years
preceding the effective date are not permitted. We are evaluating the effect, if
any, that the adoption of SFAS 141(R) will have on our results of operations,
financial position, and the related disclosures.





In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157, Fair Value
Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair value
measurements.  We have adopted the provisions of SFAS 157 with respect
to financial assets and liabilities effective January 1, 2008, as
required.  In February 2008, the FASB issued Staff Position No. FAS
157-2, Effective Date of FASB
Statement No. 157 which provides a one-year deferral of the effective
date of SFAS 157 for non-financial assets and liabilities, except those that are
recognized or disclosed in the financial statements at fair value at least
annually.  In accordance with this interpretation, we have only
adopted the provisions of SFAS 157 with respect to its financial assets and
liabilities that are measured at fair value within the interim financial
statements starting as of January 1, 2008.  The adoption of SFAS 157
did not have a material impact on our results of operations, financial
condition, or cash flow.





In
March 2008, the FASB issued Statement of Financial Accounting Standards No.
161, Disclosures about
Derivative Instruments and Hedging Activities (“SFAS 161”), which
requires enhanced disclosures about how these instruments and activities affect
the entity’s financial position, financial performance and cash flows. The
standard requires disclosure of the fair values of derivative instruments and
their gains and losses in a tabular format. It also provides more information
about an entity’s liquidity by requiring disclosure of derivative features that
are credit risk-related. Finally, it requires cross-referencing within footnotes
to enable financial statement users to locate important information about
derivative instruments. SFAS 161 is effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008. We
are evaluating the effect, if any, that the adoption of SFAS 161 will have on
our results of operations, financial position, and the related
disclosures.





In May
2008, the FASB issued Statement of Financial Accounting Standards No. 162, The Hierarchy of Generally Accepted
Accounting Principles (“SFAS 162”), which establishes the GAAP hierarchy,
identifying the sources of accounting principles and the framework for selecting
the principles to be used in the preparation of financial
statements.  SFAS 162 was declared effective in December 2008
following the SEC approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles.  The
implementation of SFAS 162 has not had any impact on our consolidated financial
statements.





In May
2008, the FASB issued Statement of Financial Accounting Standards No. 163, Accounting for Financial Guarantee
Insurance Contracts (“SFAS 163”), which requires than an insurance
enterprise recognizes a claim liability prior to an event of default when there
is evidence that credit deterioration has occurred in an insured financial
obligation.  SFAS 163 also clarifies how SFAS 60, Accounting and Reporting by
Insurance Enterprises, applies to financial guarantee contracts,
including the recognition and measurement to be used to account for premium
revenue and claim liabilities.  It also requires expanded disclosures
about the financial guarantee insurance contracts.  Adoption of SFAS
163 is required for fiscal years beginning after December 15, 2008, except for
some disclosures about the insurance enterprise’s risk management activities,
which are required the first period beginning after the issuance of
Statement.  Except for those disclosures, earlier adoption of SFAS 163
is not permitted.  We do not believe that implementation of SFAS 163
will have any impact on our consolidated financial statements.





CRITICAL
ACCOUNTING POLICIES AND ESTIMATES





Preparation
of our financial statements requires estimates and judgments to be made that
affect the amounts of assets, liabilities, revenues and expenses reported. Such
decisions include the selection of the appropriate accounting principles to be
applied and the assumptions on which to base accounting estimates. Management
continually evaluates these estimates based on historical experience and other
assumptions we believe to be reasonable under the circumstances.





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




16




Of the
significant accounting policies described in the notes to the financial
statements, we believe that the following may involve a higher degree of
estimates, judgments, and complexity:





Commitments
and Contingencies





Contingencies,
by their nature relate to uncertainties that require management to exercise
judgment both in assessing the likelihood that a liability has been incurred, as
well as in estimating the amount of the potential expense.  In conformity
with accounting principles generally accepted in the U.S., we accrue an expense
when it is probable that a liability has been incurred and the amount can be
reasonably estimated.





Inventory
Valuation





We
account for our inventories at estimated market value. These inventories are
agricultural commodities that are freely traded, have quoted market prices, may
be sold without significant further processing, and have predictable and
insignificant costs of disposal. We derive our estimates from local market
prices determined by grain terminals in our area. Processed product price
estimates are determined by the ending sales contract price as of the close of
the final day of the period. This price is determined by the average closing
price on the Chicago Board of Trade, net of the local basis, for the last three
business days of the period and the first two business days of the subsequent
period. Changes in the market values of these inventories are recognized as a
component of cost of goods sold.





Long-Lived
Assets





Depreciation
and amortization of our property, plant and equipment is provided on the
straight-lined method by charges to operations at rates based upon the expected
useful lives of individual or groups of assets. Economic circumstances or other
factors may cause management’s estimates of expected useful lives to differ from
actual.





Long-lived
assets, including property, plant and equipment and investments are evaluated
for impairment on the basis of undiscounted cash flows whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. An impaired asset is written down to its estimated fair market
value based on the best information available. Considerable management judgment
is necessary to estimate undiscounted future cash flows and may differ from
actual.





We
evaluate the recoverability of identifiable intangible assets whenever events or
changes in circumstances indicate that an intangible asset’s carrying value may
not be recoverable.  Such circumstances could include, but are not
limited to: (1) a significant decrease in the market value of an asset,
(2) a significant adverse change in the extent or manner in which an asset
is used, or (3) an accumulation of costs significantly in excess of the
amount originally expected for the acquisition of an asset. We measure the
carrying amount of the asset against the estimated undiscounted future cash
flows associated with it.  Should the sum of the expected future net
cash flows be less than the carrying value of the asset being evaluated, an
impairment loss would be recognized.





The
impairment loss would be calculated as the amount by which the carrying value of
the asset exceeded its fair value.  The fair value is measured based
on quoted market prices, if available. If quoted market prices are not
available, the estimate of fair value is based on various valuation techniques,
including the discounted value of estimated future cash flows.  The
evaluation of asset impairment requires us to make assumptions about future cash
flows over the life of the asset being evaluated. These assumptions require
significant judgment and actual results may differ from assumed and estimated
amounts.





Accounting
for Derivative Instruments and Hedging Activities





We
minimize the effects of changes in the price of agricultural commodities by
using exchange-traded futures and options contracts to minimize our net
positions in these inventories and contracts. We account for changes in market
value on exchange-traded futures and option contracts at exchange prices and
account for the changes in value of forward purchase and sales contracts at
local market prices determined by grain terminals in the area. Changes in the
market value of all these contracts are recognized in earnings as a component of
cost of goods sold.




17


Item
7A.     Quantitative and Qualitative Disclosure about Market
Risk.





Commodities
Risk & Risk Management.To reduce the price change risks
associated with holding fixed price commodity positions, we generally take
opposite and offsetting positions by entering into commodity futures contracts
(either a straight or options futures contract) on a regulated commodity futures
exchange, the Chicago Board of Trade. While hedging activities reduce the risk
of loss from changing market prices, such activities also limit the gain
potential which otherwise could result from these significant fluctuations in
market prices. Our policy is generally to maintain a hedged position within
limits, but we can be long or short at any time. Our profitability is primarily
derived from margins on soybeans processed, not from hedging transactions.
Management does not anticipate that its hedging activity will have a significant
impact on future operating results or liquidity. Hedging arrangements do not
protect against nonperformance of a cash contract.





At any
one time, our inventory and purchase contracts for delivery to our facility
may be substantial. We have risk management policies and procedures that
include net position limits. They are defined by commodity, and include both
trader and management limits. This policy and procedure triggers a review by
management when any trader is outside of position limits. The position limits
are reviewed at least annually with the board of managers. We monitor current
market conditions and may expand or reduce the limits in response to
changes in those conditions.





Foreign Currency
Risk.We conduct essentially all of our business in U.S. dollars and have
no direct risk regarding foreign currency fluctuations. Foreign currency
fluctuations do, however, impact the ability of foreign buyers to purchase U.S.
agricultural products and the competitiveness of and demand for U.S.
agricultural products compared to the same products offered by foreign
suppliers.





Interest Rate
Risk.We manage exposure to interest rate changes by using variable rate
loan agreements with fixed rate options. Long-term loan agreements can utilize
the fixed option through maturity; however, the revolving ability to pay down
and borrow back would be eliminated once the funds were fixed.





Item
8.        Financial Statements and
Supplementary Data.





Reference
is made to the “Index to Financial Statements” of South Dakota Soybean
Processors, LLC located on the page immediately preceding page F-1 of this
report, and financial statements and schedules for the years ended
December 31, 2008, 2007 and 2006.





Item
9.       Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure.





None.





Item
9A(T).     Controls and Procedures.





Evaluation of
Disclosure Controls and Procedures.  Our management,
with the participation of our Chief Executive Officer and Principal Accounting
Officer, has evaluated the effectiveness of our “disclosure controls and
procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the
end of the period covered by this report. Based on this evaluation, our
management has concluded that our disclosure controls and procedures are
effective to ensure that information required to be disclosed by us in reports
that we file or submit under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and
forms.  Additionally, based on management’s evaluation, our disclosure
controls and procedures were effective in ensuring that information required to
be disclosed in our Exchange Act reports is accumulated and communicated to our
management, including our Chief Executive Officer and Principal Accounting
Officer, to allow timely decisions regarding required disclosures.





Management’s
report on internal control over financial reporting.Our management is
responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rule 13a-15(f) of the Securities
Exchange Act of 1934.  Our internal control over financial reporting
is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles.  Our internal control over financial reporting includes
those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of assets; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with U.S. generally accepted accounting principles, and
that our receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisitions, use, or disposition of our assets that could have a material
effect on the financial statements.





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




18




As of
December 31, 2008, management assessed our internal control over financial
reporting in relation to criteria described in Internal Control- Integrated
Framework, issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment using those criteria, we concluded
that, as of December 31, 2008, our internal control over financial
reporting is effective. Our management reviewed the results of their assessment
with the Audit Committee.





This
Annual Report does not include a report of our registered public accounting firm
regarding internal control over financial reporting.  Our internal
control over financial reporting was not subject to an audit report by our
registered public accounting firm pursuant to temporary rules of the
Commission that permit us to provide only management’s report in this
report.





Changes in
Internal Control over Financial Reporting.  There was no
change in our internal control over financial reporting that occurred during the
quarter ended December 31, 2008 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.





/s/
      Rodney ChristiansonRodney
      Christianson, Chief ExecutiveOfficer(Principal
      Executive Officer)





Item
9B.     Other Information.





None.


PART III





Pursuant
to General Instructions G(3), we omit Part III, Items 10, 11, 12, 13, and
14, and incorporate such items by reference to an amendment to this Annual
Report on Form 10-K or to an Information Statement to be filed with the
Commission within 120 days after the close of the fiscal year covered by this
Report (December 31, 2008).





Part IV





Item
15.      Exhibits, Financial Statement
Schedules.





The
following exhibits and financial statements are filed as part of, or are
incorporated by reference into, this report:





(a)(1)     Financial Statements
— Reference is made to the “Index to Financial Statements” of South Dakota
Soybean Processors, LLC located on the page immediately preceding page F-1
of this report for a list of the financial statements for the year ended
December 31, 2008.  The financial statements appear on
page F-3 of this Report.





(2)          All
supplemental schedules are omitted because of the absence of conditions under
which they are required or because the information is shown in the Consolidated
Financial Statements or notes thereto.





(3)          Exhibits - See
Exhibit Index following the Signature Page to this report. The
following exhibits constitute management agreements, compensatory plans, or
arrangements: Exhibits 10.7, 10.8, 10.9, and 10.10.





Pursuant
to the requirement of Section 13 or 15(d) of the Securities Exchange
Act, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.




19




SIGNATURES





SOUTH
      DAKOTA SOYBEANPROCESSORS,
      LLCDate:
      March 31,
    2009
              /s/
      Rodney G. ChristiansonRodney
      G. ChristiansonChief
      Executive OfficerDate:
      March 31,
    2009
              /s/
      Mark HydeMark
      HydeController,
      Principal Accounting Officer




20




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





SOUTH
      DAKOTA SOYBEANPROCESSORS,
      LLCDate:
      March 31,
    2009
                /s/
      Rodney G. ChristiansonRodney
      G. ChristiansonChief
      Executive Officer(Principal
      Executive Officer)SOUTH
      DAKOTA SOYBEANPROCESSORS,
      LLCDate:
      March 31,
    2009
                /s/
      Mark HydeMark
      HydeController,
      Principal Accounting OfficerDate:
      March 31,
    2009
                /s/
      Paul BarthelPaul
      Barthel, ManagerDate:
      March 31,
    2009
                /a/
      Alan ChristensenAlan
      Christensen, ManagerDate:
      March 31,
    2009
                /s/
      Dean ChristophersonDean
      Christopherson, ManagerDate:
      March 31,
    2009
                /s/
      David DriessenDavid
      Driessen, ManagerDate
      March 31,
    2009
                /s/
      Paul DummerPaul
      Dummer, ManagerDate:
      March 31,
    2009
                /s/
      Wayne EngerWayne
      Enger, ManagerDate:
      March 31,
    2009
                /s/
      Dan FeigeDan
      Feige, ManagerDate:
      March 31,
    2009
                /s/
      Ronald J. GorderRonald
      J. Gorder, ManagerDate:
      March 31,
    2009
                /s/
      Marvin HopeMarvin
      Hope, ManagerDate:
      March 31,
    2009
                /s/
      James JepsenJames
      Jepsen, ManagerDate:
      March 31,
    2009
                /s/
      Jerome JerzakJerome
      Jerzak, ManagerDate:
      March 31,
    2009
                /s/
      Peter KontzPeter
      Kontz, ManagerDate:
      March 31,
    2009
                /s/
      Bryce LoomisBryce
      Loomis, Manager




21




Date:
      March 31,
    2009
            /s/
      Robert NelsenRobert
      Nelsen, ManagerDate:
      March 31,
    2009
            /s/
      Robert NelsonRobert
      Nelson, ManagerDate:
      March 31,
    2009
            /s/
      Maurice OdenbrettMaurice
      Odenbrett, ManagerDate:
      March 31,
    2009
            /s/
      Randy TauerRandy
      Tauer, ManagerDate
      March 31,
    2009
            /s/
      Delbert TschakertDelbert
      Tschakert, ManagerDate:
      March 31,
    2009
            /s/
      Lyle TrautmanLyle
      Trautman, ManagerDate:
      March 31,
    2009
            /s/
      Ardon WekArdon
      Wek, ManagerDate:
      March 31,
    2009
            /s/
      Gary WertishGary
      Wertish, Manager




22




EXHIBIT INDEX**





Exhibit
                                                                      Number
                                                                    
                                                                    Description
                                                                    
                                                                    Filed
                                                                      Herewith
                                                                    
                                                                    Incorporated Herein by Reference to3.1(i)
                                                                    
                                                                    Articles
      of Organization.
                                                                    
                                                                    
                                                                    
                                                                    Appendix
      A to the Registrant’s Prospectus filed with the Commission pursuant to
      Rule 424(b)(3) on May 24, 2002 (File
      No. 333-75804).3.1(ii)
                                                                    
                                                                    Operating
      Agreement, as amended and restated.
                                                                    
                                                                    
                                                                    
                                                                    Exhibit 99.1 to
      the Registrant’s Form 8-K filed on June 28,
  2007.3.1(iii)
                                                                    
                                                                    Articles
      of Amendment to Articles of Organization.
                                                                    
                                                                    
                                                                    
                                                                    Exhibit 3.1(iii) to
      the Registrant’s Form 10-QSB filed with the Commission on
      August 14, 2002.4.1
                                                                    
                                                                    Form of
      Class A Unit Certificate.
                                                                    
                                                                    
                                                                    
                                                                    Exhibit 4.1
      to the Registrant’s Form S-4 filed with the Commission on
      December 21, 2001. (File No. 333-75804)10.1
                                                                    
                                                                    Form of
      Mortgage and Security Agreement with CoBank dated October 2,
      1995.
                                                                    
                                                                    
                                                                    
                                                                    Exhibit 10.1
      to the Registrant’s Form S-4 filed with the Commission on
      December 21, 2001. (File No. 333-75804)10.2
                                                                    
                                                                    Urethane
      Soy Systems Company, Inc. Stock Purchase Agreement dated
      May 30, 2000.
                                                                    
                                                                    
                                                                    
                                                                    Exhibit 10.5
      to the Registrant’s Form S-4 filed with the Commission on
      December 21, 2001. (File No. 333-75804)10.3
                                                                    
                                                                    Vegetable
      Oil Supply Agreement with Urethane Soy Systems Company, Inc. dated
      August 2, 1999 and January 10, 2001.
                                                                    
                                                                    
                                                                    
                                                                    Exhibit 10.6
      to the Registrant’s Form S-4 filed with the Commission on
      December 21, 2001. (File No. 333-75804)10.4
                                                                    
                                                                    Track
      Lease Agreement with DM&E Railroad dated October 15,
      1996.
                                                                    
                                                                    
                                                                    
                                                                    Exhibit 10.10
      to the Registrant’s Form S-4 filed with the Commission on
      December 21, 2001. (File No. 333-75804)10.5
                                                                    
                                                                    Railroad
      Car Lease Agreement with Trinity Industries dated February 12,
      2002.
                                                                    
                                                                    
                                                                    
                                                                    Exhibit 10.15
      to the Registrant’s Form S-4 filed with the Commission on
      March 14, 2002. (File No. 333-75804)10.6
                                                                    
                                                                    Stock
      Purchase Agreement with Urethane Soy Systems, Co. and certain
      shareholders.
                                                                    
                                                                    
                                                                    
                                                                    Exhibit 10.16
      to the Registrant’s Form 8-K filed with the Commission on
      January 14, 2003.10.7
                                                                    
                                                                    Rodney
      Christianson Employment Agreement dated February 1,
    2008.
                                                                    
                                                                    
                                                                    
                                                                    Exhibit 10.1
      to the Registrant’s Form 10-Q filed with the Commission May 14,
      2008.10.8
                                                                    
                                                                    First
      Amended and Restated Deferred Compensation Plan for the benefit of Rodney
      Christianson, dated February 1, 2004.
                                                                    
                                                                    
                                                                    
                                                                    Exhibit 10.15
      to the Registrant’s Form 10-K filed with the Commission on
      March 30, 2004.10.9
                                                                    
                                                                    Thomas
      Kersting Employment Agreement dated May 20, 1996.
                                                                    
                                                                    
                                                                    
                                                                    Exhibit 10.18
      to the Registrant’s Form 10-K filed with the Commission on
      March 27, 2003.10.10
                                                                    
                                                                    Deferred
      Compensation Plan for the benefit of Thomas Kersting, dated
      February 13, 2001.
                                                                    
                                                                    
                                                                    
                                                                    Exhibit 10.20
      to the Registrant’s Form 10-K filed with the Commission on
      March 27, 2003.10.11
                                                                    
                                                                    Railcar
      Leasing Agreements with General Electric Railcar Services Corporation,
      dated November 10, 2003 and November 25, 2003.
                                                                    
                                                                    
                                                                    
                                                                    Exhibit 10.19
      to the Registrant’s Form 10-K filed with the Commission on
      March 30,
2004.




23




10.12
            
            Security
      Agreement with CoBank dated June 17, 2004.
            
            
            
            Exhibit 10.1
      to the Registrant’s Form 10-Q filed with the Commission on
      August 16, 2004.10.13
            
            Master
      Loan Agreement with CoBank dated October 6, 2005.
            
            
            
            Exhibit 10.21
      to the Registrant’s Form 10-K filed with the Commission on
      March 31, 2006.10.14
            
            Heads
      of Agreement with Transocean dated April 28, 2006
            
            
            
            Exhibit 10.1
      to the Registrant’s Form 10-Q filed with the Commission on
      May 15,2006.10.15
            
            Statused
      Revolving Credit Supplement dated December 28, 2007.
            
            
            
            Exhibit
      10.22 to the Registrant’s Form 10-K filed with the Commission on March 31,
      200810.16
            
            Statused
      Revolving Credit Supplement dated February 29, 2008.
            
            
            
            Exhibit
      10.23 to the Registrant’s Form 10-K filed with the Commission on March 31,
      2008.10.17
            
            Amendment
      to Master Loan Agreement and Statused Revolving Credit Supplement dated
      October 6, 2008
            
            
            
            Exhibit
      10.1 to the Registrant’s Form 10-Q filed with the Commission on November
      14, 2008.10.18
            
            Amendment
      to Master Loan Agreement and Statused Revolving Credit Supplement dated
      December 24, 2008.
            
            X10.19
            
            Amendment
      to Master Loan Agreement dated March 23, 2009
            
            X21.1
            
            Subsidiaries
      of the Company.
            
            X31.1
            
            Rule 13a-14(a)/15d-14(a) Certification.
            
            X32.1
            
            Section 1350
      Certification.
            
            X


* The
redacted portions of Exhibit B (2 pages) and Exhibit C
(6 pages) to Exhibit 10.8 were filed separately with the SEC subject
to a request for confidential treatment dated April 25, 2002.





**
Documents can be found at www.sec.gov




24




SOUTH
DAKOTA SOYBEAN PROCESSORS, LLC





CONSOLIDATED
FINANCIAL STATEMENTS





DECEMBER
31, 2008, 2007 AND 2006





SOUTH
DAKOTA SOYBEAN PROCESSORS, LLC





Index to
Financial Statements










PageREPORTS OF INDEPENDENT
      REGISTERED PUBLIC ACCOUNTING FIRMS
              F-1FINANCIAL
      STATEMENTSConsolidated
      Balance Sheets
              F-3Consolidated
      Statements of Operations
              F-5Consolidated
      Statements of Changes in Members’ Equity
              F-6Consolidated
      Statements of Cash Flows
              F-7Notes
      to Consolidated Financial Statements
              F-9




















REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 The Board
of Managers
 South
Dakota Soybean Processors, LLC
 Volga,
South Dakota
 
 We have
audited the accompanying consolidated balance sheet of South Dakota Soybean
Processors, LLC (the “Company”) as of December 31, 2008 and the related
consolidated statements of operations, changes in members’ equity and cash flows
for the year ended December 31, 2008.  These consolidated financial
statements are the responsibility of the Company’s management.  Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement.  The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting.  Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting.  Accordingly, we express no such opinion.  An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements, assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.  We
believe that our audit provides a reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of South Dakota
Soybean Processors, LLC as of December 31, 2008 and the consolidated results of
its operations and its cash flows for the year ended December 31, 2008, in
conformity with accounting principles generally accepted in the United States of
America.
 
 
 
 Greenwood
Village, Colorado
 March 24,
2009









F-1




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 The Board
of Managers
 South
Dakota Soybean Processors, LLC
 Volga,
South Dakota
 
 We have
audited the accompanying consolidated balance sheet of South Dakota Soybean
Processors, LLC as of December 31, 2007 and the related consolidated statements
of operations, changes in members’ equity and cash flows for each of the two
years ended December 31, 2007 and 2006.  These consolidated financial
statements are the responsibility of the Company’s management.  Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement.  The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting.  Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting.  Accordingly, we express no such opinion.  An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements, assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.  We
believe that our audits provide a reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of South Dakota
Soybean Processors, LLC as of December 31, 2007 and the consolidated results of
its operations and its cash flows for each of the years in the two years ended
December 31, 2007 and 2006 in conformity with accounting principles generally
accepted in the United States of America.
 
 
  Greenwood
Village, Colorado
 March 21,
2008


F-2


SOUTH
DAKOTA SOYBEAN PROCESSORS, LLC


CONSOLIDATED
BALANCE SHEETS


DECEMBER
31, 2008 AND 2007







2008
                
                
                2007ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                
                $
                9,332
                
                
                $
                9,247Trade
      accounts receivable, less allowance for uncollectible accounts (2008 -
      $78,000; 2007 - $176,000)
                
                
                18,939,727
                
                
                
                23,981,054Inventories
                
                
                22,621,675
                
                
                
                34,103,546Margin
      deposits
                
                
                -
                
                
                
                4,277,535Prepaid
      expenses
                
                
                544,105
                
                
                
                564,378Investments
      in cooperatives - current
                
                
                -
                
                
                
                644,184Total
      current assets
                
                
                42,114,839
                
                
                
                63,579,944PROPERTY
      AND EQUIPMENT
                
                
                54,344,281
                
                
                
                53,237,984Less
      accumulated depreciation
                
                
                (31,038,838
                )
                
                
                (28,970,943
                )Total
      property and equipment, net
                
                
                23,305,443
                
                
                
                24,267,041OTHER
      ASSETSInvestments
      in cooperatives
                
                
                8,055,962
                
                
                
                8,084,875Notes
      receivable - members
                
                
                148,898
                
                
                
                460,042Patents
      and other intangible assets, net
                
                
                5,640,572
                
                
                
                5,970,235Total
      other assets
                
                
                13,845,432
                
                
                
                14,515,152Total
      assets
                
                $
                79,265,714
                
                
                $
                102,362,137





The
accompanying notes are an integral part of these consolidated financial
statements.


F-3


SOUTH
DAKOTA SOYBEAN PROCESSORS, LLC


CONSOLIDATED
BALANCE SHEETS (continued)


DECEMBER
31, 2008 AND 2007





2008
                
                
                2007LIABILITIES
      AND MEMBERS' EQUITYCURRENT
      LIABILITIESExcess
      of outstanding checks over bank balance
                
                $
                2,408,396
                
                
                $
                1,807,599Current
      maturities of long-term debt
                
                
                819,017
                
                
                
                2,175,951Note
      payable - seasonal loan
                
                
                -
                
                
                
                23,448,082Accounts
      payable
                
                
                1,117,600
                
                
                
                1,724,294Accrued
      commodity purchases
                
                
                25,174,258
                
                
                
                21,087,943Margin
      deposit deficit
                
                
                252,281
                
                
                
                -Accrued
      expenses
                
                
                1,890,668
                
                
                
                1,702,353Accrued
      interest
                
                
                88,281
                
                
                
                9,375Total
      current liabilities
                
                
                31,750,501
                
                
                
                51,955,597LONG-TERM
      LIABILITIESLong-term
      debt, less current maturities
                
                
                9,300,000
                
                
                
                11,901,188Deferred
      compensation
                
                
                107,405
                
                
                
                121,361Total
      long-term liabilities
                
                
                9,407,405
                
                
                
                12,022,549COMMITMENTS
      AND CONTINGENCIESTEMPORARY
      EQUITY, net of subscriptions receivable of  $2,259 and $6,098 at
      December 31, 2008 and 2007, respectively, consisting of 70,750 and 604,750
      Class A capital units, respectively
                
                
                140,491
                
                
                
                1,219,402MEMBERS'
      EQUITYClass
      A Units, no par value, 30,419,000 units issued
      and outstanding
                
                
                37,967,317
                
                
                
                37,164,589Total
      liabilities, temporary equity and members' equity
                
                $
                79,265,714
                
                
                $
                102,362,137





The
accompanying notes are an integral part of these consolidated financial
statements.


F-4


SOUTH
DAKOTA SOYBEAN PROCESSORS, LLC


CONSOLIDATED
STATEMENTS OF OPERATIONS


FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006








2008
                
                
                2007
                
                
                2006NET
      REVENUES
                
                $
                360,114,676
                
                
                $
                247,741,767
                
                
                $
                212,721,926COST
      OF REVENUESCost
      of product sold
                
                
                314,142,855
                
                
                
                207,484,862
                
                
                
                168,833,417Production
                
                
                17,840,158
                
                
                
                15,840,012
                
                
                
                15,754,959Freight
      and rail
                
                
                18,586,803
                
                
                
                17,064,268
                
                
                
                18,651,204Brokerage
      fees
                
                
                350,215
                
                
                
                312,275
                
                
                
                286,186Total
      cost of revenues
                
                
                350,920,031
                
                
                
                240,701,417
                
                
                
                203,525,766GROSS
      PROFIT
                
                
                9,194,645
                
                
                
                7,040,350
                
                
                
                9,196,160OPERATING
      EXPENSESAdministration
                
                
                6,041,727
                
                
                
                3,938,405
                
                
                
                3,487,773OPERATING
      PROFIT
                
                
                3,152,918
                
                
                
                3,101,945
                
                
                
                5,708,387OTHER
      INCOME (EXPENSE)Interest
      expense
                
                
                (2,331,105
                )
                
                
                (2,105,676
                )
                
                
                (629,070
                )Other
      non-operating income
                
                
                2,415,944
                
                
                
                3,107,907
                
                
                
                2,426,168Patronage
      dividend income
                
                
                248,580
                
                
                
                49,240
                
                
                
                148,182Total
      other income (expense)
                
                
                333,419
                
                
                
                1,051,471
                
                
                
                1,945,280INCOME
      BEFORE INCOME TAXES
                
                
                3,486,337
                
                
                
                4,153,416
                
                
                
                7,653,667INCOME
      TAX EXPENSE (BENEFIT)
                
                
                300
                
                
                
                (7,160
                )
                
                
                2,308NET
      INCOME
                
                $
                3,486,037
                
                
                $
                4,160,576
                
                
                $
                7,651,359BASIC
      AND DILUTED EARNINGS PER CAPITAL UNIT
                
                $
                0.11
                
                
                $
                0.14
                
                
                $
                0.25WEIGHTED
      AVERAGE NUMBER OF UNITS  OUTSTANDING FOR CALCULATION OF BASIC
      AND DILUTED EARNINGS PER CAPITAL UNIT
                
                
                30,419,000
                
                
                
                30,419,000
                
                
                
                30,419,000





The
accompanying notes are an integral part of these consolidated financial
statements.


F-5


SOUTH
DAKOTA SOYBEAN PROCESSORS, LLC


CONSOLIDATED
STATEMENT OF CHANGES IN MEMBERS’ EQUITY


FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006








ClassAUnitsUnits
                
                
                AmountBALANCES,
      JANUARY 1, 2006
                
                
                30,419,000
                
                
                $
                28,482,403Net
      income
                
                
                -
                
                
                
                7,651,359Recognition
      of capital units previously recorded as temporary equity
                
                
                -
                
                
                
                3,270,251BALANCES,
      DECEMBER 31, 2006
                
                
                30,419,000
                
                
                
                39,404,013Net
      income
                
                
                -
                
                
                
                4,160,576Distributions
      to members
                
                
                -
                
                
                
                (6,400,000
                )BALANCES,
      DECEMBER 31, 2007
                
                
                30,419,000
                
                
                
                37,164,589Net
      income
                
                
                -
                
                
                
                3,486,037Recognition
      of capital units previously recorded as temporary equity
                
                
                
                
                
                
                1,082,750Distributions
      to members
                
                
                -
                
                
                
                (3,766,059
                )BALANCES,
      DECEMBER 31, 2008
                
                
                30,419,000
                
                
                $
                37,967,317





The
accompanying notes are an integral part of these consolidated financial
statements.


F-6


SOUTH
DAKOTA SOYBEAN PROCESSORS, LLC


CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006




2008
                      
                      
                      2007
                      
                      
                      2006OPERATING
      ACTIVITIESNet
      income
                      
                      $
                      3,486,037
                      
                      
                      $
                      4,160,576
                      
                      
                      $
                      7,651,359Charges
      and credits to net income not affecting cash:Depreciation
      and amortization
                      
                      
                      2,530,644
                      
                      
                      
                      2,689,574
                      
                      
                      
                      3,324,808(Gain)
      loss on sales of property and equipment
                      
                      
                      (29,000
                      )
                      
                      
                      552
                      
                      
                      
                      -Gain
      on equity method investment
                      
                      
                      -
                      
                      
                      
                      (577,240
                      )
                      
                      
                      (667,726
                      )Non-cash
      patronage dividends
                      
                      
                      (123,540
                      )
                      
                      
                      (24,611
                      )
                      
                      
                      (74,076
                      )Change
      in current assets and liabilities
                      
                      
                      24,806,173
                      
                      
                      
                      (29,453,823
                      )
                      
                      
                      (1,549,011
                      )NET
      CASH FROM (USED FOR) OPERATING ACTIVITIES
                      
                      
                      30,670,314
                      
                      
                      
                      (23,204,972
                      )
                      
                      
                      8,685,354INVESTING
      ACTIVITIESProceeds
      from investments in cooperatives
                      
                      
                      420,120
                      
                      
                      
                      -
                      
                      
                      
                      -Investments
      in MnSP
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (420,120
                      )Retirement
      of patronage dividends
                      
                      
                      376,517
                      
                      
                      
                      27,922
                      
                      
                      
                      -Patent
      costs
                      
                      
                      (117,577
                      )
                      
                      
                      (99,806
                      )
                      
                      
                      (89,704
                      )Proceeds
      from sales of property and equipment
                      
                      
                      29,000
                      
                      
                      
                      6,855
                      
                      
                      
                      -Purchase
      of property and equipment
                      
                      
                      (1,121,806
                      )
                      
                      
                      (1,002,652
                      )
                      
                      
                      (660,397
                      )NET
      CASH (USED FOR) INVESTING ACTIVITIES
                      
                      
                      (413,746
                      )
                      
                      
                      (1,067,681
                      )
                      
                      
                      (1,170,221
                      )FINANCING
      ACTIVITIESChange
      in excess of outstanding checks over bank balances
                      
                      
                      600,797
                      
                      
                      
                      (2,538,488
                      )
                      
                      
                      3,675,583Net
      (payments) proceeds from seasonal borrowings
                      
                      
                      (23,448,082
                      )
                      
                      
                      23,448,082
                      
                      
                      
                      -Distributions
      to members
                      
                      
                      (3,766,059
                      )
                      
                      
                      (6,400,000
                      )
                      
                      
                      -Decrease
      in member loans
                      
                      
                      314,983
                      
                      
                      
                      232,695
                      
                      
                      
                      2,580Proceeds
      from issuance of capital units
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (10,049
                      )Proceeds
      from long-term debt
                      
                      
                      -
                      
                      
                      
                      1,300,000
                      
                      
                      
                      -Principal
      payments on long-term debt
                      
                      
                      (3,958,122
                      )
                      
                      
                      (77,155
                      )
                      
                      
                      (2,942,037
                      )NET
      CASH FROM (USED FOR) FINANCING ACTIVITIES
                      
                      
                      (30,256,483
                      )
                      
                      
                      15,965,134
                      
                      
                      
                      726,077NET
      CHANGE IN CASH AND CASH EQUIVALENTS
                      
                      
                      85
                      
                      
                      
                      (8,307,519
                      )
                      
                      
                      8,241,210CASH
      AND CASH EQUIVALENTS, BEGINNING OF YEAR
                      
                      
                      9,247
                      
                      
                      
                      8,316,766
                      
                      
                      
                      75,556CASH
      AND CASH EQUIVALENTS,END OF YEAR
                      
                      $
                      9,332
                      
                      
                      $
                      9,247
                      
                      
                      $
                      8,316,766




(continued
on next page)
  F-7
  SOUTH
DAKOTA SOYBEAN PROCESSORS, LLC


CONSOLIDATED
STATEMENTS OF CASH FLOWS (continued)


FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006








2008
                
                
                2007
                
                
                2006SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONCash
      paid during the year for:Interest
                
                $
                2,252,199
                
                
                $
                2,131,587
                
                
                $
                1,350,123Income
      taxes
                
                $
                -
                
                
                $
                -
                
                
                $
                -





The
accompanying notes are an integral part of these consolidated financial
statements.


F-8


SOUTH
DAKOTA SOYBEAN PROCESSORS, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
1 -  PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING
POLICIES





Organization





South
Dakota Soybean Processors, LLC (the “Company” or “LLC”) processes and sells
soybean products, such as soybean oil, meal and hulls.  The Company’s
principal operations are in Volga, South Dakota.





The
Company holds a 91.62% equity interest in Urethane Soy Systems Company (“USSC”),
which is responsible for marketing, formulation and technical support of
Soyol® (a
polyol made from soybean oil) and related systems.  The Company
consolidates the operations of USSC.





Principles
of consolidation





Investee
companies in which the Company directly or indirectly owns more than 50% of the
outstanding voting securities or those over which the Company has effective
control are generally accounted for under the consolidation method of
accounting.  Under this method, an Investee company’s balance sheet
and results of operations are reflected within the Company’s Consolidated
Financial Statements.  All significant intercompany accounts and
transactions have been eliminated.  Minority interest in the net
assets and earnings and losses of a consolidated Investee are reflected in the
caption “Minority interest of consolidated subsidiary” in the Company’s
Consolidated Balance Sheet and Statement of Operations.  Minority
interest adjusts the Company’s results of operations to reflect only the
Company’s share of the earnings or losses of the consolidated Investee
company.  Upon dilution of control below 50%, the accounting method is
adjusted to the equity or cost method of accounting, as appropriate, for
subsequent periods.





Cash
and cash equivalents





The
Company considers all highly liquid investment instruments with maturity of
three months or less at the time of acquisition to be cash
equivalents.





Accounts
receivable





Accounts
receivable are considered past due when payments are not received within thirty
days. Generally, these accounts receivable represent amounts due for sale of
soybean meal, oil, hulls and refined oil.  The Company charges finance
fees to customers that are over thirty days past-due.





The
carrying amount of trade receivables is reduced by a valuation allowance that
reflects management’s estimate of amounts that will not be
collected.  Management reviews all receivable balances that exceed 90
days from the invoice date and, based on an assessment of current
creditworthiness, estimates the portion, if any, of the balance that may not be
collected.





Inventories





Finished
goods (soybean meal, oil, refined oil, and hulls) and raw materials (soybeans)
are valued at estimated market value.  This accounting policy is in
accordance with the guidelines described in AICPA Statement of Position No.
85-3, “Accounting by
Agricultural Producers and Agricultural Cooperatives.” Supplies and other
inventories are stated at the lower of cost, determined by the first-in,
first-out method, or market.




(continued
on next page)


F-9


SOUTH
DAKOTA SOYBEAN PROCESSORS, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





Investments





Investments
in cooperatives are carried at cost plus the amount of patronage earnings
allocated to the Company, less any cash distributions received.





Prior to
September 1, 2007, the Company accounted for its 6.95% investment in Minnesota
Soybean Processors (MnSP) using the equity method due to the related nature of
operations and the Company’s ability to influence management decisions of
MnSP.  Under the equity method, the initial investment is recorded at
cost and adjusted annually to recognize the Company’s share of earnings and
losses of the entity.  On September 1, 2007, the services and
management agreement between the two companies was
terminated.  Commencing on that date, the Company ceased the
accounting for its investment in MnSP under the equity method, and began
accounting for the investment at cost plus the amount of patronage earnings
allocated to the Company, less any cash distributions received.





Property
and equipment





Property
and equipment is stated at cost. Expenditures for renewals and improvements that
significantly add to the productive capacity or extend the useful life of an
asset are capitalized.  Expenditures for maintenance and repairs are
charged to expense when incurred. When depreciable properties are sold or
retired, the cost and accumulated depreciation are eliminated from the accounts
and the resultant gain or loss is reflected in income.





Depreciation
is provided for over the estimated useful lives of the individual assets using
the straight-line method.  The range of the estimated useful lives
used in the computation of depreciation is as follows:





Buildings
      and improvements
                        
                        10-39 yearsEquipment
      and furnishings
                        
                        3-15
      years





The
Company reviews its long-lived assets for impairment whenever events indicate
that the carrying amount of the asset may not be recoverable. If impairment
indicators are present and the future cash flows is less than the carrying
amount of the assets, values are reduced to the estimated fair value of those
assets.





Patents





The
Company’s patents are amortized over their estimated useful lives, using the
straight-line method over a period of 16 to 20 years, which is the shorter of
the remaining estimated economic life of the patents acquired or 20 years from
the original file date.





Use of estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period.  Actual results
could differ from those estimates.





Revenue
Recognition





Revenue
is recognized when the related products are shipped, which is when title is
transferred to the customer.  Revenues are presented net of discounts
and sales allowances.




(continued
on next page)


F-10


SOUTH
DAKOTA SOYBEAN PROCESSORS, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





Freight





The
Company presents all amounts billed to the customer for freight as a component
of net revenue.  Costs incurred for freight are reported as a
component of cost of revenue.





The
Company’s “Shipping and Handling Costs” policy is in accordance with EITF Issue
00-10, Accounting for Shipping
and Handling Fees and Costs.





Advertising
costs





Advertising
and promotion costs are expensed as incurred. The Company incurred $111,641,
$121,643, and $50,717 of advertising costs in the years ended December 31, 2008,
2007, and 2006, respectively.





Environmental
remediation





It is
management’s opinion that the amount of any potential environmental remediation
costs will not be material to the Company’s financial condition, results of
operations, or cash flows; therefore, no accrual has been recorded.





Accounting
for derivative instruments and hedging activities





All of
the Company’s derivatives are designated as non-hedge
derivatives.  The futures and options contracts used by the Company
are discussed below.  Although the contracts may be effective economic
hedges of specified risks, they are not designated as, nor accounted for, as
hedging instruments.





The Company, as part of its trading
activity, uses futures and option contracts offered through regulated commodity
exchanges to reduce risk.  The Company is exposed to risk of loss in
the market value of inventories.  To reduce that risk, the Company
generally takes opposite and offsetting positions using futures contracts or
options.





Unrealized
gains and losses on futures and options contracts used to hedge soybean, oil and
meal inventories are recognized as a component of net proceeds for financial
reporting. Inventories are recorded at estimated market value. Consequently,
unrealized gains and losses on derivative contracts are offset by unrealized
gains and losses on inventories and reflected in current earnings.





Earnings
per capital unit





Earnings
per capital unit are calculated based on the weighted average number of capital
units outstanding.  The Company has no other capital units or other
member equity instruments that are dilutive for purposes of calculating earnings
per capital unit.





Income
taxes





On June
20, 2002, the members approved a plan of reorganization to convert the
Cooperative's structure from an exempt organization to a limited liability
company.  Accordingly, under the Internal Revenue Code, the income of
the Company flows through to the members to be taxed at the individual level and
there is no corporate income tax provision.





The tax
basis of the Company’s net assets exceeds the book value of those assets by
approximately $6.8 million at December 31, 2008.




(continued
on next page)


F-11


SOUTH
DAKOTA SOYBEAN PROCESSORS, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





Recent
accounting pronouncements





In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 141(R), Business Combinations (“SFAS
141(R)”).  SFAS 141(R) expands the definition of transactions and
events that qualify as business combinations; requires that the acquired assets
and liabilities, including contingencies, be recorded at the fair value
determined on the acquisition date and changes thereafter reflected in revenue,
not goodwill; changes the recognition timing for restructuring costs; and
requires acquisition costs to be expensed as incurred. Adoption of SFAS
141(R) is required for combinations after December 15, 2008. Early
adoption and retroactive application of SFAS 141(R) to fiscal years
preceding the effective date are not permitted. We are evaluating the effect, if
any, that the adoption of SFAS 141(R) will have on our results of operations,
financial position, and the related disclosures.





In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157, Fair Value
Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair value
measurements.  The Company has adopted the provisions of SFAS 157 with
respect to financial assets and liabilities effective January 1, 2008, as
required.  In February 2008, the FASB issued Staff Position No. FAS
157-2, Effective Date of FASB
Statement No. 157 which provides a one-year deferral of the effective
date of SFAS 157 for non-financial assets and liabilities, except those that are
recognized or disclosed in the financial statements at fair value at least
annually.  In accordance with this interpretation, the Company has
only adopted the provisions of SFAS 157 with respect to its financial assets and
liabilities that are measured at fair value within the interim financial
statements starting as of January 1, 2008.  The adoption of SFAS 157
did not have a material impact on the Company’s results of operations, financial
condition, or cash flow.





In
March 2008, the FASB issued Statement of Financial Accounting Standards No.
161, Disclosures about
Derivative Instruments and Hedging Activities (“SFAS 161”), which
requires enhanced disclosures about how these instruments and activities affect
the entity’s financial position, financial performance and cash flows. The
standard requires disclosure of the fair values of derivative instruments and
their gains and losses in a tabular format. It also provides more information
about an entity’s liquidity by requiring disclosure of derivative features that
are credit risk-related. Finally, it requires cross-referencing within footnotes
to enable financial statement users to locate important information about
derivative instruments. SFAS 161 is effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008. We
are evaluating the effect, if any, that the adoption of SFAS 161 will have on
our results of operations, financial position, and the related
disclosures.





In May
2008, the FASB issued Statement of Financial Accounting Standards No. 162, The Hierarchy of Generally Accepted
Accounting Principles (“SFAS 162”), which establishes the GAAP hierarchy,
identifying the sources of accounting principles and the framework for selecting
the principles to be used in the preparation of financial
statements.  SFAS 162 was declared effective in December 2008
following the SEC approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles.  The
implementation of SFAS 162 has not had any impact on the Company’s consolidated
financial statements.




(continued
on next page)


F-12


SOUTH
DAKOTA SOYBEAN PROCESSORS, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





In May
2008, the FASB issued Statement of Financial Accounting Standards No. 163, Accounting for Financial Guarantee
Insurance Contracts (“SFAS 163”), which requires than an insurance
enterprise recognizes a claim liability prior to an event of default when there
is evidence that credit deterioration has occurred in an insured financial
obligation.  SFAS 163 also clarifies how SFAS 60, Accounting and Reporting by
Insurance Enterprises, applies to financial guarantee contracts,
including the recognition and measurement to be used to account for premium
revenue and claim liabilities.  It also requires expanded disclosures
about the financial guarantee insurance contracts.  Adoption of SFAS
163 is required for fiscal years beginning after December 15, 2008, except for
some disclosures about the insurance enterprise’s risk management activities,
which are required the first period beginning after the issuance of
Statement.  Except for those disclosures, earlier adoption of SFAS 163
is not permitted.  We do not believe that implementation of SFAS 163
will have any impact on the Company’s consolidated financial
statements.





NOTE
2 -  INVENTORIES





2008
                  
                  
                  2007Finished
      goods
                  
                  $
                  5,960,820
                  
                  
                  $
                  (1,564,589
                  )Raw
      materials
                  
                  
                  16,598,148
                  
                  
                  
                  35,620,472Supplies
      & miscellaneous
                  
                  
                  62,707
                  
                  
                  
                  47,663Totals
                  
                  $
                  22,621,675
                  
                  
                  $
                  34,103,546





Finished
goods and raw materials are valued at estimated market value, which approximates
net realizable value.  In addition, futures and option contracts are
marked to market through cost of revenues, with unrealized gains and losses
recorded in the above inventory amounts.  This market adjustment
caused the finished goods to have a credit balance as of December 31,
2007.  Supplies and other inventories are stated at the lower of cost,
determined by the first-in, first-out method, or market.





NOTE
3 -  MARGIN DEPOSITS





The
Company has margin deposits with a commodity brokerage firm used to acquire
futures and option contracts to manage the price volatility risk of soybeans,
crude soybean oil and soybean meal.  Consistent with its inventory
accounting policy, these contracts are recorded at market value.  At
December 31, 2008, the Company’s futures contracts all mature within twelve
months.





NOTE
4 -  INVESTMENTS IN COOPERATIVES





2008
                
                
                2007Investments
      in associated cooperative companies:Minnesota
      Soybean Processors
                
                $
                3,820,437
                
                
                $
                4,464,621Cenex
      Harvest States
                
                
                3,336,217
                
                
                
                3,488,670CoBank
                
                
                899,308
                
                
                
                775,7688,055,962
                
                
                
                8,729,059Less
      current maturities
                
                
                -
                
                
                
                (644,184
                )Totals
                
                $
                8,055,962
                
                
                $
                8,084,875




(continued
on next page)




F-13




SOUTH DAKOTA SOYBEAN
PROCESSORS, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





In August
2004, the Company exchanged a storage facility with a net book value of
$2,322,561 for 1,400,400 Class A shares in Minnesota Soybean Processors (MnSP),
a Minnesota cooperative association.  The shares approximate 6.95% of
MnSP’s outstanding equity.  In 2006, the Company also invested another
$420,120 when MnSP declared a unit retain equal to $0.30 per share of Class A
Preferred Stock.  In 2004, the Company also acquired 287,500 8% Class
B Non-Cumulative Convertible preferred shares in MnSP for
$575,000.  Prior to September 1, 2007, the Company accounted for its
6.95% investment in MnSP using the equity method due to the related nature of
operations and the Company’s ability to influence management decisions of
MnSP.  The Company recognized gains (losses) of $0, $577,240, and
$667,726 in 2008, 2007, and 2006, respectively, which is included in other
non-operating income (expense).  On September 1, 2007, the services
and management agreement between the two companies was
terminated.  Commencing on that date, the Company ceased the
accounting for its investment in MnSP under the equity method, and began
accounting for the investment at cost plus the amount of patronage earnings
allocated to the Company, less any cash distributions received.  The
financial statements as of December 31, 2006 have been reclassified
accordingly.





On
December 21, 2007, MnSP issued a press release announcing that they would pay
back the $0.30 per Class A share unit retain in January 2008.  MnSP
also announced that they would pay a $0.16 per Class A share cash dividend in
March 2008.  The Company’s portion of these two distributions was
$644,184, which had been classified as a current asset on the balance sheet as
of December 31, 2007.





NOTE
5 -  PROPERTY AND EQUIPMENT





2008Accumulated
                  
                  
                  
                  
                  
                  2007Cost
                  
                  
                  Depreciation
                  
                  
                  Net
                  
                  
                  NetLand
                  
                  $
                  237,643
                  
                  
                  $
                  -
                  
                  
                  $
                  237,643
                  
                  
                  $
                  237,643Land
      improvements
                  
                  
                  219,372
                  
                  
                  
                  35,356
                  
                  
                  
                  184,016
                  
                  
                  
                  57,881Buildings
      and improvements
                  
                  
                  14,502,760
                  
                  
                  
                  4,590,620
                  
                  
                  
                  9,912,140
                  
                  
                  
                  10,307,438Machinery
      and equipment
                  
                  
                  37,410,330
                  
                  
                  
                  25,581,521
                  
                  
                  
                  11,828,809
                  
                  
                  
                  12,661,521Company
      vehicles
                  
                  
                  274,404
                  
                  
                  
                  188,202
                  
                  
                  
                  86,202
                  
                  
                  
                  117,570Furniture
      and fixtures
                  
                  
                  1,133,244
                  
                  
                  
                  643,139
                  
                  
                  
                  490,105
                  
                  
                  
                  467,972Construction
      in progress
                  
                  
                  566,528
                  
                  
                  
                  -
                  
                  
                  
                  566,528
                  
                  
                  
                  417,016Totals
                  
                  $
                  54,344,281
                  
                  
                  $
                  31,038,838
                  
                  
                  $
                  23,305,443
                  
                  
                  $
                  24,267,041





NOTE
6 -  PATENTS AND OTHER INTANGIBLE ASSETS





On
January 1, 2003, the Company acquired an additional 54% interest in the
outstanding common stock of USSC to bring its total ownership interest to
approximately 58%.  The results of USSC’s operations have been
consolidated in the Company’s financial statements since that
date.  The acquisition of a controlling interest in USSC allows the
Company to develop and market soy-based polyurethane
products.  Subsequently, through the participation in additional
equity offering, SDSP has increased its majority ownership in USSC to
91.62%.





The
allocation of the purchase price of USSC resulted in an assignment of $7,401,245
to patents.  None of these patent costs recognized for financial
reporting purposes is expected to be deductible for tax purposes.  The
patents are being amortized using the straight-line method over a period of 16
to 20 years, which is the shorter of the remaining estimated economic life of
the patents acquired or 20 years from the original file
date.  Amortization expense was $446,518, $434,245, and $433,872 for
the years ended December 31, 2008, 2007, and 2006, respectively.




(continued
on next page)




F-14


SOUTH
DAKOTA SOYBEAN PROCESSORS, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





The
following table provides information regarding the Company’s other intangible
assets as of December 31, 2008 and 2007:





AccumulatedIntangibleAssets
                        
                        Life
                        
                        Cost
                        
                        
                        Amortization
                        
                        
                        NetAs
      of December 31, 2008:Patents
                        
                        16-20
      Yrs.
                        
                        $
                        8,194,952
                        
                        
                        $
                        (2,576,728
                        )
                        
                        $
                        5,618,224Loan
      Origination Costs
                        
                        10
      Yrs.
                        
                        
                        46,625
                        
                        
                        
                        (45,000
                        )
                        
                        
                        1,625Trademarks
                        
                        
                        
                        
                        20,723
                        
                        
                        
                        -
                        
                        
                        
                        20,723$
                        8,262,300
                        
                        
                        $
                        (2,621,728
                        )
                        
                        $
                        5,640,572As
      of December 31, 2007:Patents
                        
                        16-20
      Yrs.
                        
                        $
                        8,087,205
                        
                        
                        $
                        (2,136,715
                        )
                        
                        $
                        5,950,490Loan
      Origination Costs
                        
                        10
      Yrs.
                        
                        
                        46,625
                        
                        
                        
                        (44,278
                        )
                        
                        
                        2,347Trademarks
                        
                        
                        
                        
                        17,398
                        
                        
                        
                        -
                        
                        
                        
                        17,398$
                        8,151,228
                        
                        
                        $
                        (2,180,993
                        )
                        
                        $
                        5,970,235





Future
amortization expense related to patents, loan origination costs and trademarks
is expected to be approximately:


For
      the years ending December 31:2009
              
              $
              470,4012010
              
              
              470,4012011
              
              
              469,8592012
              
              
              469,6792013
              
              
              469,679Thereafter
              
              
              3,290,553Total
              
              $
              5,640,572




NOTE
7 - NOTES PAYABLE – SEASONAL LOAN





The
Company has entered into a revolving credit agreement with CoBank, which expires
February 1, 2010. The purpose of the credit agreement is to finance the
inventory and accounts receivable of the Company. On December 24, 2008, the
Company amended its Master Loan Agreement.  Under the amendment, the
Company may borrow up to $40 million. Interest accrues at a variable rate (3.50%
at December 31, 2008).  Advances on the revolving credit agreement are
secured and limited to qualifying inventory and accounts receivable, net of
accrued commodity purchases.  There were advances outstanding of $0
and $23,448,082 at December 31, 2008 and 2007, respectively.  The
remaining available funds to borrow under the terms of the revolving credit
agreement are $39,524,000 as of December 31, 2008.




(continued
on next page)




F-15


SOUTH
DAKOTA SOYBEAN PROCESSORS, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
8 -  LONG-TERM DEBT





2008
                  
                  
                  2007Revolving
      term loan from CoBank, interest at variable rates (3.50% and 6.75% at
      December 31, 2008 and 2007, respectively), secured by substantially all
      property and equipment. Loan matures March 20, 2013.
                  
                  $
                  9,869,017
                  
                  
                  $
                  13,200,000Note
      payable to former USSC shareholders, due in annual principal payments of
      $891,000, interest at 0%, secured by USSC stock. Note matured on October
      31, 2006.
                  
                  
                  -
                  
                  
                  
                  621,191Note
      payable to Richard Kipphart, issued February 13, 2002, with quarterly
      interest payments at 15% which began on June 30, 2002, and are paid in
      quarterly installments thereafter.  No prepayment of principal
      is allowed prior to maturity.  Note matured on February 13,
      2005.
                  
                  
                  250,000
                  
                  
                  
                  250,000Notes
      payable to various creditors at rates ranging from 0% to
      7.5%.  Notes mature on or before March 16, 2009.
                  
                  
                  -
                  
                  
                  
                  5,94810,119,017
                  
                  
                  
                  14,077,139Less
      current maturities
                  
                  
                  (819,017
                  )
                  
                  
                  (2,175,951
                  )Totals
                  
                  $
                  9,300,000
                  
                  
                  $
                  11,901,188





The
Company entered into an agreement as of March 26, 2007 with CoBank to amend and
restate its Master Loan Agreement (MLA), which includes both the revolving term
loan and the seasonal loan discussed in Note 8.  Under the terms and
conditions of the MLA, CoBank agreed to make advances to the Company for up to
$13,200,000 on the revolving term loan. The available commitment decreases in
scheduled periodic increments of $1,300,000 every six months.  These
payments were waived for the September 2007 and March 2008
periods.  The principal balance outstanding on the revolving term loan
was $9,869,017 and $13,200,000 as of December 31, 2008 and 2007,
respectively.  The remaining commitment available to borrow on the
revolving term loan as of December 31, 2008 was $2,030,983.  Under
this agreement, the Company is subject to compliance with standard financial
covenants and the maintenance of certain financial ratios.  The
Company was in compliance with all covenants and conditions with CoBank as of
December 31, 2008.




(continued
on next page)


F-16


SOUTH
DAKOTA SOYBEAN PROCESSORS, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





The
minimum principal payments on long-term debt obligations will be as
follows:





For
      the years ending December 31:2009
                  
                  $
                  819,0172010
                  
                  
                  2,600,0002011
                  
                  
                  2,600,0002012
                  
                  
                  2,600,0002013
                  
                  
                  1,500,000Total
                  
                  $
                  10,119,017





NOTE
9 -  EMPLOYEE BENEFIT PLANS





The
Company maintains a Section 401(k) plan for employees who meet the eligibility
requirements set forth in the plan documents.  The Company matches a
percentage of employees’ contributed earnings.  The amounts charged to
expense under this plan were approximately $91,000, $66,000, and $48,000 for the
years ended December 31, 2008, 2007, and 2006, respectively.





The
Company has a deferred compensation plan for key employees.  The
agreements provide benefits, which vest over a three-year period.  The
Company shall pay the employees in five equal annual installments upon
retirement.  The future payments have been discounted at
8%.  The amount recognized as expense (benefit) during the years ended
December 31, 2008, 2007, and 2006 was $(3,335), $30,389, and $(16,861),
respectively.  The Company made payments of approximately $10,600
during each of 2008, 2007, and 2006. Deferred compensation payable is recorded
at $107,405 and $121,361 as of December 31, 2008 and 2007,
respectively.





NOTE
10 -  COMMITMENTS





Operating
Leases





The
Company has operating leases for 267 rail cars from GE Capital.  The
leases require monthly payments of $106,665.  The Company also leases
90 rail cars from Trinity Capital.  This lease requires monthly
payments of $34,470.  The Company also leases 66 rail cars from AIG
Rail Services.  This lease requires monthly payments of
$25,608.  The leases began between 1996 and 2004 and have terms
ranging from 10-18 years.  Lease expense for all rail cars was
$2,001,287, $1,998,223, and $2,096,951 for the years ended December 31, 2008,
2007, and 2006, respectively.  The Company generates revenues from the
use of 322 of these rail cars on other railroads.  Such revenues were
$1,500,463, $1,528,301, and $1,888,207 for the years ended December 31, 2008,
2007, and 2006, respectively.





The
Company has entered into a sub-lease agreement with the Dakota, Minnesota &
Eastern Railroad Corporation (“DME”) for the hopper rail cars that it leases
from GE Capital.  The Company recognizes revenue from this sub-lease
as the hopper rail cars are used by the DME.  The sub-lease is for a
twelve-month period and is renewed annually.  The Company is
responsible for all maintenance of the rail cars.





The
Company also has a number of other operating leases for machinery and equipment.
Rental expense under these other operating leases was $700,469, $497,179, and
$147,298 for the years ended December 31, 2008, 2007, and 2006,
respectively.




(continued
on next page)




F-17


SOUTH
DAKOTA SOYBEAN PROCESSORS, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





The
following is a schedule of future minimum rental payments required under these
operating leases.





RailCars
                  
                  
                  Other
                  
                  
                  TotalYear
      ended December 31:2009
                  
                  $
                  2,000,916
                  
                  
                  $
                  140,355
                  
                  
                  $
                  2,141,2712010
                  
                  
                  2,000,916
                  
                  
                  
                  108,060
                  
                  
                  
                  2,108,9762011
                  
                  
                  2,000,916
                  
                  
                  
                  102,795
                  
                  
                  
                  2,103,7112012
                  
                  
                  2,000,916
                  
                  
                  
                  82,596
                  
                  
                  
                  2,083,5122013
                  
                  
                  2,000,916
                  
                  
                  
                  13,362
                  
                  
                  
                  2,014,278Thereafter
                  
                  
                  7,244,362
                  
                  
                  
                  -
                  
                  
                  
                  7,244,362Totals
                  
                  $
                  17,248,942
                  
                  
                  $
                  447,168
                  
                  
                  $
                  17,696,110





Letter
of Credit





At
December 31, 2008 and 2007 the Company had an outstanding irrevocable standby
letter of credit in the amount of $476,000, expiring in October
2013.  The letter is being maintained as security for performance on a
long-term contract with a natural gas supplier.





NOTE
11 -  CASH FLOW INFORMATION





The
following is a schedule of changes in assets and liabilities used to determine
cash from operating activities:





2008
                  
                  
                  2007
                  
                  
                  2006(Increase)
      decrease in assets:Trade
      accounts receivable
                  
                  $
                  5,041,327
                  
                  
                  $
                  (8,026,477
                  )
                  
                  $
                  (5,664,169
                  )Inventories
                  
                  
                  11,481,871
                  
                  
                  
                  (18,289,751
                  )
                  
                  
                  (6,874,133
                  )Margin
      account deposit
                  
                  
                  4,529,816
                  
                  
                  
                  (3,355,328
                  )
                  
                  
                  (376,153
                  )Prepaid
      expenses
                  
                  
                  20,273
                  
                  
                  
                  32,590
                  
                  
                  
                  (28,113
                  )21,073,287
                  
                  
                  
                  (29,638,966
                  )
                  
                  
                  (1,614,230
                  )Increase
      (decrease) in liabilities:Accounts
      payable
                  
                  
                  (606,694
                  )
                  
                  
                  509,090
                  
                  
                  
                  527,980Accrued
      commodity purchases
                  
                  
                  4,086,315
                  
                  
                  
                  186,279
                  
                  
                  
                  (633,770
                  )Accrued
      expenses and interest
                  
                  
                  267,221
                  
                  
                  
                  (529,995
                  )
                  
                  
                  198,489Deferred
      compensation
                  
                  
                  (13,956
                  )
                  
                  
                  19,769
                  
                  
                  
                  (27,480
                  )3,732,886
                  
                  
                  
                  185,143
                  
                  
                  
                  65,219Total
                  
                  $
                  24,806,173
                  
                  
                  $
                  (29,453,823
                  )
                  
                  $
                  (1,549,011
                  )




F-18


SOUTH
DAKOTA SOYBEAN PROCESSORS, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
12 -  FAIR VALUE OF FINANCIAL INSTRUMENTS





Effective
January 1, 2008, the Company adopted Statement of Financial Accounting Standards
No. 157, Fair Value
Measurements (“SFAS 157”), which provides a comprehensive framework for
measuring fair value and expands disclosures which are required about fair value
measurements.  Specifically, SFAS 157 sets forth a definition of fair
value and establishes a hierarchy prioritizing the inputs to valuation
techniques, giving the highest priority to quoted prices in active markets for
identical assets and liabilities and the lowest priority to unobservable value
inputs.  The adoption of this statement had an immaterial impact on
the Company’s financial statements.  SFAS 157 defines the hierarchy as
follows:





·
            Level
      1 – Quoted prices are available in active markets for identical assets or
      liabilities as of the reported date. The types of assets and liabilities
      included in Level 1 are highly liquid and actively traded instruments with
      quoted prices, such as equities listed on the New York Stock Exchange and
      commodity derivative contracts listed on the Chicago Board of Trade
      (“CBOT”).


·
            Level
      2 – Pricing inputs are other than quoted prices in active markets, but are
      either directly or indirectly observable as of the reported
      date.  The types of assets and liabilities in Level 2 are
      typically either comparable to actively traded securities or contracts, or
      priced with models using highly observable inputs, such as commodity
      prices using forward future prices.


·
            Level
      3 – Significant inputs to pricing that are unobservable as of the
      reporting date.  The types of assets and liabilities included in
      Level 3 are those with inputs requiring significant management judgment or
      estimation, such as complex and subjective models and forecasts used to
      determine the fair value of financial transmission
  rights.





The
following table sets forth financial assets and liabilities measured at fair
value in the consolidated balance sheets and the respective levels to which fair
value measurements are classified within the fair value hierarchy as of December
31, 2008:





FairValueasofDecember31,2008Level1
                    
                    
                    Level2
                    
                    
                    Level3
                    
                    
                    TotalFinancial
      assets:Cash
      equivalents
                    
                    $
                    9,332
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    9,332Inventory
                    
                    $
                    1,362,559
                    
                    
                    $
                    17,225,635
                    
                    
                    $
                    -
                    
                    
                    $
                    18,588,194Margin
      deposits (deficits)
                    
                    $
                    (252,281
                    )
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    (252,281
                    )





The fair
value of the Company’s long-term debt approximates the carrying
value.  The interest rates on the long-term debt is similar to rates
the Company would be able to obtain currently in the market.





The
Company enters into various commodity derivative instruments, including futures,
options, swaps and other agreements.  The fair value of the Company’s
commodity derivatives is determined using unadjusted quoted prices for identical
instruments on the Chicago Board of Trade (“CBOT”).  The Company
estimates the fair market value of their finished goods and raw materials
inventories using the market price quotations of similar forward future
contracts listed on the CBOT and adjusts for the local market adjustments
derived from other grain terminals in our area.


F-19


SOUTH
DAKOTA SOYBEAN PROCESSORS, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
13 -  RELATED PARTY TRANSACTIONS





During
August 2000, the Company entered into an agreement with Minnesota Soybean
Processors Cooperative (MnSP) for certain services and management of a proposed
soybean processing plant.  The Company agreed to reinvest a minimum of
80% of the fees earned from MnSP in equity units of MnSP.  During
2004, the Company exchanged a storage facility with a net book value of
$2,322,561 as its investment and paid cash of $600,931.





The
Company was hired to provide management and marketing services to MnSP on a
cost-sharing basis for automatically renewing five-year periods beginning in
late 2003. On August 28, 2006, MnSP’s Board of Directors gave the Company a
one-year notice of termination of the services and management agreement
effective September 1, 2007.





The
Company was reimbursed by MnSP for shared personnel costs, including labor and
benefits, of $0, $1,049,150, and $1,603,285 under this arrangement for the years
ended December 31, 2008, 2007, and 2006, respectively. As of December 31, 2008
and 2007, MnSP owed the Company $0 and $62,000, respectively.





In
addition, the Company is providing up to $1 million in interest free loans to
members of the Company who chose to invest in MnSP.  The loans are
secured by members’ equity in the Company.  As of December 31, 2008
and 2007, the Company had outstanding notes receivable pursuant to this
arrangement of $147,898 and $459,042, respectively.  These will be
repaid as the Board of Managers approves distributions of prior
earnings.





The
Company and MnSP also purchase and sell processed products such as soybean meal,
soybean oil, biodiesel, etc. For the years ended December 31, 2008, 2007, and
2006 the Company had sales to MnSP in the amount of $0, $124,429, and $658,120,
respectively.  During the years ended December 31, 2008, 2007, and
2006, the Company also purchased products totaling $0, $3,924,624, and
$13,745,174, respectively, from MnSP.





Occasionally
the Company subleases rail cars to MnSP.  The Company charged MnSP $0,
$125,013, and $296,654 for these subleases during the years ended December 31,
2008, 2007, and 2006, respectively.





NOTE
14 -  BUSINESS CREDIT RISK AND CONCENTRATIONS





The
Company maintains its cash balances with various financial institutions. At
times during the year, the Company’s balances exceeded the $250,000 insurance
limit of the Federal Deposit Insurance Corporation. This represents a
concentration of credit risk. The Company has not experienced any losses on its
deposits of cash and cash equivalents to date.





The
Company also grants credit to customers throughout the United States and
Canada.  The Company evaluates each customer’s credit worthiness on a
case-by-case basis.  Accounts receivable are generally
unsecured.  These receivables were $19,026,441 and $23,967,610 at
December 31, 2008 and 2007, respectively.





Soybean
meal sales accounted for approximately 53% of total revenues for the year ended
December 31, 2008, 54% of total revenues for the year ended December 31, 2007,
and 51% of total revenues for the year ended December 31,
2006.  Approximately 31% of these sales were made to two customers for
the year ended December 31, 2008.  At December 31, 2008, these
customers owed the Company approximately $3,902,000.  Refined oil
sales represented approximately 30% of total revenues for the year ended
December 31, 2008, 35% of total revenues for the year ended December 31, 2007,
and 27% of total revenues for the year ended December 31, 2006.  These
sales were primarily made to two customers for the year ended December 31, 2008.
These customers owed the Company approximately $4,006,000 at December 31,
2008.




F-20


SOUTH
DAKOTA SOYBEAN PROCESSORS, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





Net
revenue by geographic area for the years ended December 31, 2008, 2007, and 2006
are as follows:





2008
                  
                  
                  2007
                  
                  
                  2006United
      States
                  
                  $
                  331,991,930
                  
                  
                  $
                  224,015,899
                  
                  
                  $
                  195,971,017Canada
                  
                  
                  28,122,746
                  
                  
                  
                  23,725,868
                  
                  
                  
                  16,750,909$
                  360,114,676
                  
                  
                  $
                  247,741,767
                  
                  
                  $
                  212,721,926





NOTE
15 -  MEMBERS’ EQUITY





A minimum
of 2,500 capital units is required for an ownership interest in the
Company.  Such units are subject to certain transfer
restrictions.  The Company retains the right to redeem the units at
the greater of $.20 per unit or the original purchase price less cumulative
distributions through the date of redemption in the event a member attempts to
dispose of the units in a manner not in conformity with the Operating Agreement,
if a member becomes a holder of less than 2,500 units, or if a member becomes an
owner (directly or indirectly) of more than 1.5% of the issued and outstanding
capital units.  The Company’s Operating Agreement also includes
provisions whereby cash equal to a minimum of 30% of available net income will
be distributed to unit holders subject to certain limitations.  These
limitations include a minimum net income of $500,000, restrictions imposed by
debt and credit instruments or as restricted by law in the event of
insolvency.  Earnings, losses and cash distributions are allocated to
members based on their percentage of ownership in the Company.





The Board
of Managers approved a Form S-1 registration statement that was filed with the
Securities and Exchange Commission on February 14, 2005 for the sale of
additional units in a public offering.  The maximum offering under the
statement was $11,250,000.  During 2005, the Company sold 2,190,500
member units for a total of $4,495,750, which is accounted for as temporary
equity as described in Note 17. The offering allowed the investor to initially
pay 50% and sign a note payable to the Company for the remaining portion. At
December 31, 2008 and 2007, the Company had subscriptions receivable of $2,259
and $6,098, respectively, which is accounted for as a deduction from temporary
equity until collected.





On
February 20, 2008, the Company’s Board of Managers approved a cash distribution
of approximately $3.8 million.  In accordance with our operating
agreement and distribution policy, the distribution was issued to our members as
well as to eligible persons of our predecessor cooperative who were subject to
patronage retainage through written notices of allocation.  Over $2.4
million (approximately 7.7¢ per capital unit) was distributed to our members on
February 28, 2008, and the $1.4 million distribution to eligible persons of our
predecessor cooperative was distributed on April 28, 2008.





NOTE
16 -  CONTINGENCIES





From time
to time in the ordinary course of our business, we may be named as a defendant
in legal proceedings related to various issues, including without limitation,
workers’ compensation claims, tort claims, or contractual disputes. We carry
insurance that provides protection against general commercial liability claims,
claims against our directors, officers and employees, business interruption,
automobile liability, and workers’ compensation claims. Except as described
below, we are not currently involved in any material legal proceedings and are
not aware of any potential claims.




F-21




SOUTH
DAKOTA SOYBEAN PROCESSORS, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





On
January 31, 2007, the Company was named as a defendant in a lawsuit filed
in the U.S District Court for the District of Minnesota, along with other
individual defendants, including the Company’s chief executive officer,
commercial manager, and two Board members. The plaintiffs, Transocean Group
Holdings PTY Ltd. and Transocean Global Biofuels PTY Ltd., of Sydney, Australia
(“Transocean”), allege that the Company breached a heads of agreement with
Transocean dated April 28, 2006.  The heads of agreement concerned the
potential development and operation of a biodiesel refinery through a company
called High Plains Biofuels, Inc., to be owned by the Company and Transocean as
shareholders. Transocean alleges that the individual defendants breached
fiduciary duties to High Plains Biofuels. Transocean is seeking relief for its
expectation damages which is unknown at this time.  Based upon their
investigation of the facts surrounding the case, management believes that
Transocean’s allegations are meritless and are vigorously defending the
action.  The Company filed an answer to Transocean’s complaint on
September 17, 2007.  Transocean filed an amendment complaint on
January 18, 2008 to which the Company filed an answer on February 7,
2008.  The Company also filed a motion for summary judgment on January
15, 2009.  No trial date has been set for this
lawsuit.  Management cannot provide, however, any assurance that the
Company will be successful in disposing of the case or that any costs of
settlement or damages would not be material if they are unable to get the case
dismissed.





On
December 31, 2007, an arbitration demand was filed against the Company with the
American Arbitration Association. The plaintiffs, John Wawak, Ed Kurth, John
Kurth, Rich Kurth, Ed Kurth (Executor for the Estate of Bruce Kurth), and
Forrest Hickman allege that we breached a stock purchase agreement dated
December 10, 2002. The stock purchase agreement relates to our purchase of a
portion of the plaintiffs’ interests in USSC. SDSP had withheld approximately
$1.01 million, because they believed the plaintiffs had breached warranty and
indemnity provisions of the contract relating to contingent liabilities and
intellectual property rights, therefore causing the Company to incur losses in
the form of litigation expense and lost profits. The plaintiffs claim that they
are entitled to the original payments in full under the agreement. The
arbitration hearing occurred in May 2008.  On August 6, 2008 the
Company received the ruling from the arbitrators.  The ruling stated
that the Company should have only withheld $271,923 from the plaintiffs;
therefore, they ordered the Company to pay the plaintiffs $740,577 plus their
legal costs and other fees of $148,476 for a total of $889,053.  The
Company had recorded $0 and $889,053 in current maturities of long-term debt as
of December 31, 2008 and 2007, respectively.





On
June 7, 2005, the Company received notification from the Securities and
Exchange Commission (“SEC”) that the Company’s filings were under review. During
the course of the review, the SEC requested additional information about the
Company’s change in auditors for the audit of its financial statements for the
year ended December 31, 2004 as disclosed in the Company’s 8-K filing dated
January 18, 2005. After considering such information, management determined
that the independence of the audit firm, Eide Bailly LLP, with respect to its
audit of financial statements for the year ended December 31, 2003 was
compromised and decided to have the financial statements for that period
reaudited.  As a result, in the latter part of 2005 the Company’s
Board of Managers engaged Gordon, Hughes, & Banks LLP to reaudit the
financial statements for the year ended December 31, 2003. The re-audit
produced an unqualified opinion and there was no effect on previously reported
net income or member’s equity. During early 2005, prior to receiving notice of
the SEC review, the Company solicited investors through an S-1 registration
statement which included the 2003 audit opinion letter from Eide Bailly LLP and
the audited financial statements for the year ended December 31,
2003.  Because the independence of Eide Bailly was compromised for
that period, the registration statement did not meet the requirements of federal
securities law. The financial statements included in the Company’s periodic
reports for such periods, as amended, are now compliant with the independent
auditor requirements of applicable securities law, but there remains a
possibility that claims could be made against the Company relating to the
inclusion in the offering materials of the original audit opinion letter. As of
December 31, 2008 and 2007, the Company has not recorded a provision for this
matter, as management believes the likelihood of claims being asserted by
investors in the offering is remote under FAS 5. Management believes that any
liability the Company may incur would not have a material adverse effect on
its financial condition or its results of operations.  Due to the
circumstances described above, the Company has recorded the net proceeds
received to date, reduced by an amount that no longer qualifies as a possible
claim under federal and state securities laws, as temporary equity in the
accompanying consolidated balance sheets.  Amounts recorded as
temporary equity totaled $140,491 and $1,219,402 as of December 31, 2008 and
2007, respectively, consisting of 70,750 and 604,750 Class A capital units,
respectively.




F-22




SOUTH
DAKOTA SOYBEAN PROCESSORS, LLC


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE
17 -  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)





The
following table presents certain unaudited quarterly financial data for each of
the quarters in the years ended December 31, 2008, 2007 and
2006.  This information has been prepared on the same basis as the
consolidated financial statements and includes, in the opinion of the Company,
all adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the quarterly results when read in conjunction with consolidated
financial statements and related notes thereto.  The operating results
for any quarter are not necessarily indicative of results for any future period
or the full year.





Unaudited
Consolidated Statements of Operations





First
                                      
                                      
                                      Second
                                      
                                      
                                      Third
                                      
                                      
                                      FourthFor
      the Year Ended December 31, 2008:Net
      revenues
                                      
                                      $
                                      87,268,414
                                      
                                      
                                      $
                                      101,249,185
                                      
                                      
                                      $
                                      102,168,282
                                      
                                      
                                      $
                                      69,428,795Gross
      profit
                                      
                                      
                                      3,526,521
                                      
                                      
                                      
                                      3,643,872
                                      
                                      
                                      
                                      382,889
                                      
                                      
                                      
                                      1,641,363Operating
      profit (loss)
                                      
                                      
                                      1,992,032
                                      
                                      
                                      
                                      2,199,466
                                      
                                      
                                      
                                      (1,286,259
                                      )
                                      
                                      
                                      247,679Income
      (loss) before income taxes
                                      
                                      
                                      2,057,341
                                      
                                      
                                      
                                      2,170,925
                                      
                                      
                                      
                                      (1,237,809
                                      )
                                      
                                      
                                      495,880Net
      income (loss)
                                      
                                      
                                      2,057,341
                                      
                                      
                                      
                                      2,170,625
                                      
                                      
                                      
                                      (1,237,809
                                      )
                                      
                                      
                                      495,880Basic
      and diluted earnings (loss) per unit
                                      
                                      $
                                      0.07
                                      
                                      
                                      $
                                      0.07
                                      
                                      
                                      $
                                      (0.04
                                      )
                                      
                                      $
                                      0.02For
      the Year Ended December 31, 2007:Net
      revenues
                                      
                                      $
                                      51,542,154
                                      
                                      
                                      $
                                      59,976,616
                                      
                                      
                                      $
                                      60,587,433
                                      
                                      
                                      $
                                      75,635,564Gross
      profit
                                      
                                      
                                      370,550
                                      
                                      
                                      
                                      1,482,288
                                      
                                      
                                      
                                      3,216,480
                                      
                                      
                                      
                                      1,971,032Operating
      profit (loss)
                                      
                                      
                                      (609,861
                                      )
                                      
                                      
                                      590,820
                                      
                                      
                                      
                                      2,360,090
                                      
                                      
                                      
                                      760,896Income
      (loss) before income taxes
                                      
                                      
                                      (117,698
                                      )
                                      
                                      
                                      934,846
                                      
                                      
                                      
                                      2,600,421
                                      
                                      
                                      
                                      735,847Net
      income (loss)
                                      
                                      
                                      (110,538
                                      )
                                      
                                      
                                      934,846
                                      
                                      
                                      
                                      2,600,421
                                      
                                      
                                      
                                      735,847Basic
      and diluted earnings (loss) per unit
                                      
                                      $
                                      (0.00
                                      )
                                      
                                      $
                                      0.03
                                      
                                      
                                      $
                                      0.09
                                      
                                      
                                      $
                                      0.02





For
      the Year Ended December 31, 2006:Net
      revenues
                  
                  $
                  62,835,648
                  
                  
                  $
                  53,289,632
                  
                  
                  $
                  45,195,584
                  
                  
                  $
                  51,401,062Gross
      profit
                  
                  
                  1,119,831
                  
                  
                  
                  2,978,100
                  
                  
                  
                  2,102,232
                  
                  
                  
                  2,995,997Operating
      profit (loss)
                  
                  
                  252,269
                  
                  
                  
                  1,937,289
                  
                  
                  
                  1,344,617
                  
                  
                  
                  2,174,212Income
      (loss) before income taxes
                  
                  
                  309,136
                  
                  
                  
                  2,412,445
                  
                  
                  
                  1,919,658
                  
                  
                  
                  3,012,428Net
      income (loss)
                  
                  
                  309,136
                  
                  
                  
                  2,410,137
                  
                  
                  
                  1,919,658
                  
                  
                  
                  3,012,428Basic
      and diluted earnings (loss) per unit
                  
                  $
                  0.01
                  
                  
                  $
                  0.08
                  
                  
                  $
                  0.06
                  
                  
                  $
                  0.10




Certain
reclassifications have been made to the quarterly consolidated statements of
operations to conform to the annual presentations.





NOTE
18 -  SUBSEQUENT EVENT





On March
23, 2009, the Company amended its Master Loan Agreement.  Under the
amendment, CoBank agreed to delay the $1.3 million semi-annual reduction on the
Company’s revolving term loan scheduled for March 2009 until September
2013.  In addition, CoBank modified two financial covenants – one
regarding the Company’s minimum working capital requirement and the other
regarding the payment of distributions to the members.  While the loan
agreement is in effect, the Company may not declare or issue distributions to
members in excess of 50% of the Company’s consolidated net income from the prior
fiscal year without prior written consent from CoBank.  The Company’s
financial statements have not been reclassified for this event.


F-23















REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON SCHEDULE







The Board
of Managers
 South
Dakota Soybean Processors, LLC
 Volga,
South Dakota
 
 Under the
date of March 24, 2009, we reported on the consolidated balance sheet of South
Dakota Soybean Processors, LLC as of December 31, 2008, and the related
consolidated statements of operations, members’ equity, and cash flows for the
year ended December 31, 2008. In connection with our audit of the aforementioned
consolidated financial statements, we also have audited the related financial
statement schedule as listed in the accompanying index. The financial statement
schedule is the responsibility of the Company’s management. Our responsibility
is to express an opinion on the financial statement schedule based on our
audit.
  
 In our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.




Greenwood
Village, Colorado


March 24,
2009







F-24







REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON SCHEDULE






REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM ON SCHEDULE
 
 The Board
of Managers
 South
Dakota Soybean Processors, LLC
 Volga,
South Dakota
  Under the
date of March 21, 2008, we reported on the consolidated balance sheet of South
Dakota Soybean Processors, LLC as of December 31, 2007, and the related
consolidated statements of operations, members’ equity, and cash flows for the
years ended December 31, 2007 and 2006. In connection with our audits of the
aforementioned consolidated financial statements, we also have audited the
related financial statement schedules as listed in the accompanying index. The
financial statement schedules are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the financial
statement schedules based on our audits.
 
 In our
opinion, such financial statement schedules, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
 
 
 
 Greenwood
Village, Colorado
 March 21,
2008


F-25


SOUTH
DAKOTA SOYBEAN PROCESSORS, LLC


FINANCIAL
STATEMENT SCHEDULE








Charged(Credited) toBalance at
                  
                  
                  Costs and
                  
                  
                  
                  
                  
                  Balance atBeginning of
                  
                  
                  Expenses
                  
                  
                  
                  
                  
                  End ofDescription
                  
                  Period
                  
                  
                  Additions
                  
                  
                  Deductions
                  
                  
                  PeriodDeducted
      from asset accounts:Year
      ended December 31, 2006:Allowance
      for doubtful accounts
                  
                  $
                  43,157
                  
                  
                  $
                  529
                  
                  
                  $
                  (348
                  )
                  
                  $
                  43,338Deducted
      from asset accounts:Year
      ended December 31, 2007:Allowance
      for doubtful accounts
                  
                  $
                  43,338
                  
                  
                  $
                  152,000
                  
                  
                  $
                  (19,554
                  )
                  
                  $
                  175,784Deducted
      from asset accounts:Year
      ended December 31, 2008:Allowance
      for doubtful accounts
                  
                  $
                  175,784
                  
                  
                  $
                  60,656
                  
                  
                  $
                  (158,365
                  )
                  
                  $
                  78,075




F-26