##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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Form 10-K



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|   |  |                                                                                                 
|-- |  | ------------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal year ended August 31,
    2004                                                   
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|  
|   |  | For the transition period
    from           to           .                                     

Commission file number: 0-50150



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CHS Inc.

(Exact name of registrant as specified in its
charter)


|                                                                                                                             |  |                                                                           
|---------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------
|Minnesota                                                                                                                    |  | 41-0251095                                                                
|(State or other jurisdiction of
    incorporation or organization)                                                           |  | (I.R.S. Employer
    Identification Number)                               
|                                                                                                                            
|5500 Cenex Drive
    Inver Grove Heights, Minnesota 55077(Address of principal executive
    office,
    including zip code) |  | (651) 355-6000(Registrants Telephone
    number,
    including area code)



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Securities registered pursuant to
Section 12(b) of the act: None

Securities registered pursuant to
Section 12(g) of the act:

8% Cumulative Redeemable Preferred
Stock


(Title of Class)




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Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities 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.     Yes þ          No o

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of the 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:     o

Indicate by check mark whether the Registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Exchange
Act).     Yes o          No þ

State the aggregate market value of the voting
and non-voting common equity held by non-affiliates computed by
reference to the price at which the common equity was last sold,
or the average bid and asked price of such common equity, as of
the last business day of the registrants most recently
completed second fiscal quarter:

The registrants voting and non-voting
common equity has no market value (the registrant is a member
cooperative).

Indicate the number of shares outstanding of each
of the registrants classes of common stock, as of the
latest practicable date: The registrant has no common stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None.



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INDEX

|                                                         |  |                                                                                                                      |    |      |    | 
|-------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                                         |  |                                                                                                                      |    | Page
|                                                         |  |                                                                                                                      |    | No. 
|                                                         |  |                                                                                                                      |    |     
|PART I.                                                 
|Item 1.                                                  |  | Business                                                                                                             |    |      | 2  | 
|                                                         |  | Cautionary Statement                                                                                                 |    |      | 2  | 
|                                                         |  | The Company                                                                                                          |    |      | 5  | 
|                                                         |  | Agronomy                                                                                                             |    |      | 6  | 
|                                                         |  | Energy                                                                                                               |    |      | 9  | 
|                                                         |  | Country Operations and
    Services                                                                                  |    |      | 12 | 
|                                                         |  | Grain Marketing                                                                                                      |    |      | 14 | 
|                                                         |  | Processed Grains and
    Foods                                                                                       |    |      | 16 | 
|                                                         |  | Price Risk and Hedging                                                                                               |    |      | 19 | 
|                                                         |  | Employees                                                                                                            |    |      | 20 | 
|                                                         |  | Membership in the Company
    and Authorized Capital                                                                 |    |      | 20 | 
|Item 2.                                                  |  | Properties                                                                                                           |    |      | 23 | 
|Item 3.                                                  |  | Legal Proceedings                                                                                                    |    |      | 25 | 
|Item 4.                                                  |  | Submission of Matters to a
    Vote of Security Holders                                                              |    |      | 25 | 
|PART II.                                                
|Item 5.                                                  |  | Market for Registrants
    Common Equity, Related Stockholder Matters and Issuer Purchases
    of Equity Securities |    |      | 25 | 
|Item 6.                                                  |  | Selected Financial Data                                                                                              |    |      | 26 | 
|Item 7.                                                  |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations                            |    |      | 28 | 
|Item 7A.                                                 |  | Quantitative and Qualitative
    Disclosures About Market Risk                                                       |    |      | 46 | 
|Item 8.                                                  |  | Financial Statements and
    Supplementary Data                                                                      |    |      | 47 | 
|Item 9.                                                  |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure                             |    |      | 48 | 
|Item 9A.                                                 |  | Controls and Procedures                                                                                              |    |      | 48 | 
|PART III.                                               
|Item 10.                                                 |  | Directors and Executive
    Officers of the Registrant                                                               |    |      | 49 | 
|                                                         |  | Board of Directors                                                                                                   |    |      | 49 | 
|                                                         |  | Executive Officers                                                                                                   |    |      | 52 | 
|                                                         |  | Section 16(a)
    Beneficial Ownership Reporting Compliance                                                          |    |      | 54 | 
|                                                         |  | Code of Ethics                                                                                                       |    |      | 54 | 
|                                                         |  | Audit Committee Matters                                                                                              |    |      | 54 | 
|Item 11.                                                 |  | Executive Compensation                                                                                               |    |      | 55 | 
|Item 12.                                                 |  | Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters               |    |      | 62 | 
|Item 13.                                                 |  | Certain Relationships and
    Related Transactions                                                                   |    |      | 63 | 
|PART IV.                                                
|Item 14.                                                 |  | Principal Accountant Fees
    and Services                                                                           |    |      | 64 | 
|Item 15.                                                 |  | Exhibits and Financial
    Statements                                                                                |    |      | 65 | 
|SUPPLEMENTAL
    INFORMATION                             |  |                                                                                                                      | 68 |     
|SIGNATURES                                               |  |                                                                                                                      | 69 |     
|Share Option Plan                                       
|Amendment No. 2 to Share Option Plan                    
|Amendment No. 3 to Share Option Plan                    
|Amendment No. 4 to Share Option Plan                    
|CHS Inc. Share Option Plan Option Agreement             
|CHS Inc. Share Option Plan Trust Agreement              
|Amendment No. 1 to the Trust Agreement                  
|Fifth Amendment to Credit Agreement                     
|Subsidiaries of the Registrant                          
|Consnet of Independent Registered Public Accounting Firm
|Independent Auditors' Consent                           
|Power of Attorney                                       
|Certification Pursuant ot Section 302                   
|Certification Pursuant ot Section 302                   
|Certification Pursuant ot Section 906                   
|Certification Pursuant ot Section 906                   



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PART I.






|        |         
|------- | --------
|Item 1. | Business




CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE
HARBOR PROVISIONS

OF THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995


The information in this Annual Report on
Form 10-K for the year ended August 31, 2004, includes
forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 with respect to
the Company. In addition, the Company and its representatives
and agents may from time to time make other written or oral
forward-looking statements, including statements contained in
the Companys filings with the Securities and Exchange
Commission and its reports to its members and securityholders.
Words and phrases such as will likely result,
are expected to, is anticipated,
estimate, project and similar
expressions identify forward-looking statements. The Company
wishes to caution readers not to place undue reliance on any
forward-looking statements, which speak only as of the date
made.

The Companys forward-looking statements
are subject to risks and uncertainties that could cause actual
results to differ materially from those discussed in the
forward-looking statements. This Cautionary Statement is for the
purpose of qualifying for the safe harbor provisions
of the Act and is intended to be a readily available written
document that contains factors which could cause results to
differ materially from those projected in the forward-looking
statements. The following matters, among others, may have a
material adverse effect on the business, financial condition,
liquidity, results of operations or prospects, financial or
otherwise, of the Company. Reference to this Cautionary
Statement in the context of a forward-looking statement shall be
deemed to be a statement that any one or more of the following
factors may cause actual results to differ materially from those
which might be projected, forecasted, estimated or budgeted by
the Company in the forward-looking statement or
statements.

The following factors are in addition to any
other cautionary statements, written or oral, which may be made
or referred to in connection with any particular forward-looking
statement. The following review should not be construed as
exhaustive.

The Company undertakes no obligation to revise
any forward-looking statements to reflect future events or
circumstances.

Our revenues and operating results could be
adversely affected by changes in commodity
prices.Our revenues and earnings are
affected by market prices for commodities such as crude oil,
natural gas, grain, oilseeds, and flour. 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. We are
also exposed to fluctuating commodity prices as the result of
our inventories of commodities, typically grain and petroleum
products, and purchase and sale contracts at fixed or partially
fixed prices. At any time, our inventory levels and unfulfilled
fixed or partially fixed price contract obligations may be
substantial. Increases in market prices for commodities that we
purchase without a corresponding increase in the prices of our
products or our sales volume or a decrease in our other
operating expenses could reduce our revenues and net income.

In our energy operations, profitability depends
largely on the margin between the cost of crude oil that we
refine and the selling prices that we obtain for our refined
products. Prices for both crude oil and for gasoline, diesel
fuel and other refined petroleum products fluctuate widely.
Factors influencing these prices, many of which are beyond our
control, include:



| |   |                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | levels of worldwide and domestic supplies;                                                                                                        
|
| |  | capacities of domestic and foreign refineries;                                                                                                    
|
| |  | the ability of the members of OPEC to agree to
    and maintain oil price and production controls, and the price
    and level of foreign imports;

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| |   |                                                                      
| | - | ---------------------------------------------------------------------
| |  | political instability or armed conflict in
    oil-producing regions;
|
| |  | the level of consumer demand;                                        
|
| |  | the price and availability of alternative fuels;                     
|
| |  | the availability of pipeline capacity; and                           
|
| |  | domestic and foreign governmental regulations and
    taxes.         

The long-term effects of these and other
conditions on the prices of crude oil and refined petroleum
products are uncertain and ever-changing. Accordingly, we expect
our margins on and the profitability of our energy business to
fluctuate, possibly significantly, over time.

Our operating results could be adversely
affected if our members were to do business with others rather
than with us.We do not have an
exclusive relationship with our members and our members are not
obligated to supply us with their products or purchase products
from us. Our members often have a variety of distribution
outlets and product sources available to them. If our members
were to sell their products to other purchasers or purchase
products from other sellers, our revenues would decline and our
results of operations could be adversely affected.

We participate in highly competitive business
markets in which we may not be able to continue to compete
successfully.We operate in several
highly competitive business segments and our competitors may
succeed in developing new or enhanced products that are better
than ours, and may be more successful in marketing and selling
their products than we are with ours. Competitive factors
include price, service level, proximity to markets, product
quality and marketing. In some of our business segments, such as
Energy, we compete with companies that are larger, better known
and have greater marketing, financial, personnel and other
resources. As a result, we may not be able to continue to
compete successfully with our competitors.

Changes in federal income tax laws or in our
tax status could increase our tax liability and reduce our net
income.Current federal income tax
laws, regulations and interpretations regarding the taxation of
cooperatives, which allow us to exclude income generated through
business with or for a member (patronage income) from our
taxable income, could be changed. If this occurred, or if in the
future we were not eligible to be taxed as a cooperative, our
tax liability would significantly increase and our net income
significantly decrease.

We incur significant costs in complying with
applicable laws and regulations. Any failure to make the capital
investments necessary to comply with these laws and regulations
could expose us to financial
liability.We are subject to numerous
federal, state and local provisions regulating our business and
operations and we incur and expect to incur significant capital
and operating expenses to comply with these laws and
regulations. We may be unable to pass on those expenses to
customers without experiencing volume and margin losses. For
example, capital expenditures for upgrading our refineries,
largely to comply with regulations requiring the reduction of
sulfur levels in refined petroleum products, are expected to be
approximately $87.0 million for our Laurel, Montana
refinery and $311.0 million for the National Cooperative
Refinery Associations (NCRA) McPherson, Kansas refinery,
of which $49.2 million had been spent at the Laurel
refinery and $131.0 million had been spent by NCRA at the
McPherson refinery as of August 31, 2004. We expect all of
these compliance capital expenditures at the refineries to be
completed by December 31, 2005, and anticipate funding
these projects with a combination of cash flows from operations
and debt proceeds.

We establish reserves for the future cost of
meeting known compliance obligations, such as remediation of
identified environmental issues. However, these reserves may
prove inadequate to meet our actual liability. Moreover,
amended, new or more stringent requirements, stricter
interpretations of existing requirements or the future discovery
of currently unknown compliance issues may require us to make
material expenditures or subject us to liabilities that we
currently do not anticipate. Furthermore, our failure to comply
with applicable laws and regulations could subject us to
administrative penalties and injunctive relief, civil remedies
including fines and injunctions, and recalls of our products.

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Environmental liabilities could adversely
affect our results and financial
condition.Many of our current and
former facilities have been in operation for many years and,
over that time, we and other operators of those facilities have
generated, used, stored and disposed of substances or wastes
that are or might be considered hazardous under applicable
environmental laws, including chemicals and fuels stored in
underground and above-ground tanks. Any past or future actions
in violation of applicable environmental laws could subject us
to administrative penalties, fines and injunctions. Moreover,
future or unknown past releases of hazardous substances could
subject us to private lawsuits claiming damages and to adverse
publicity.

Actual or perceived quality, safety or health
risks associated with our products could subject us to liability
and damage our business and
reputation.If any of our food or feed
products became adulterated or misbranded, we would need to
recall those items and could experience product liability claims
if consumers were injured as a result. A widespread product
recall or a significant product liability judgment could cause
our products to be unavailable for a period of time or a loss of
consumer confidence in our products. Even if a product liability
claim is unsuccessful or is not fully pursued, the negative
publicity surrounding any assertion that our products caused
illness or injury could adversely affect our reputation with
existing and potential customers and our corporate and brand
image. Moreover, claims or liabilities of this sort might not be
covered by our insurance or by any rights of indemnity or
contribution that we may have against others. In addition,
general public perceptions regarding the quality, safety or
health risks associated with particular food or feed products,
such as the concern regarding genetically modified crops, could
reduce demand and prices for some of the products associated
with our businesses. To the extent that consumer preferences
evolve away from products that our members or we produce for
health or other reasons, such as the growing demand for organic
food products, and we are unable to develop products that
satisfy new consumer preferences, there will be a decreased
demand for our products.

Our operations are subject to business
interruptions and casualty losses; we do not insure against all
potential losses and could be seriously harmed by unexpected
liabilities.Our operations are
subject to business interruptions due to unanticipated events
such as explosions, fires, pipeline interruptions,
transportation delays, equipment failures, crude oil or refined
product spills, inclement weather and labor disputes. For
example:



| |   |                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our oil refineries and other facilities are
    potential targets for terrorist attacks that could halt or
    discontinue production;              
|
| |  | our inability to negotiate acceptable contracts
    with unionized workers in our operations could result in strikes
    or work stoppages; and     
|
| |  | the significant inventories that we carry could
    be damaged or destroyed by catastrophic events, extreme weather
    conditions or contamination.

We maintain insurance against many, but not all,
potential losses or liabilities arising from these operating
hazards, but uninsured losses or losses above our coverage
limits are possible. Uninsured losses and liabilities arising
from operating hazards could have a material adverse effect on
our financial position or results of operations.

Our cooperative structure limits our ability
to access equity capital.As a
cooperative, we may not sell common equity in our company. In
addition, existing laws and our articles of incorporation and
bylaws contain limitations on dividends of 8% of any preferred
stock that we may issue. These limitations restrict our ability
to raise equity capital and may adversely affect our ability to
compete with enterprises that do not face similar restrictions.

Consolidation among the producers of products
we purchase and customers for products we sell could adversely
affect our revenues and operating
results.Consolidation has occurred
among the producers of products we purchase, including crude oil
and grain, and it is likely to continue in the future.
Consolidation could increase the price of these products and
allow suppliers to negotiate pricing and other contract terms
that are less favorable to us. Consolidation also may increase
the competition among

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consumers of these products to enter into supply
relationships with a smaller number of producers resulting in
potentially higher prices for the products we purchase.


Consolidation among purchasers of our products
and in wholesale and retail distribution channels has resulted
in a smaller customer base for our products and intensified the
competition for these customers. For example, ongoing
consolidation among distributors and brokers of food products
and food retailers has altered the buying patterns of these
businesses, as they have increasingly elected to work with
product suppliers who can meet their needs nationwide rather
than just regionally or locally. If these distributors, brokers,
and retailers elect not to purchase our products, our sales
volumes, revenues, and profitability could be significantly
reduced.

If our customers chose alternatives to our
refined petroleum products our revenues and profits may
decline.Numerous alternative energy
sources currently under development could serve as alternatives
to our gasoline, diesel fuel and other refined petroleum
products. If any of these alternative products become more
economically viable or preferable to our products for
environmental or other reasons, demand for our energy products
would decline. Demand for our gasoline, diesel fuel and other
refined petroleum products also could be adversely affected by
increased fuel efficiencies.

Our agronomy business is depressed and could
continue to underperform in the
future.Demand for agronomy products
in general has been adversely affected in recent years by
drought and poor weather conditions, idle acreage and
development of insect and disease-resistant crops. These factors
could cause Agriliance, LLC, an agronomy marketing and
distribution venture in which we have a 50% interest, to be
unable to operate at profitable margins. In addition, these and
other factors, including fluctuations in the price of natural
gas and other raw materials, an increase in recent years in
domestic and foreign production of fertilizer, and intense
competition within the industry, in particular from lower-cost
foreign producers, have created particular pressure on producers
of fertilizers. As a result, CF Industries, Inc., a fertilizer
manufacturer in which we hold a minority cooperative interest,
has suffered significant losses in recent years as it has
incurred increased prices for raw materials and manufacturing
costs for those materials, but has been unable to pass those
increased costs on to its customers.

Technological improvements in agriculture
could decrease the demand for our agronomy and energy
products.Technological advances in
agriculture could decrease the demand for crop nutrients, energy
and other crop input products and services that we provide.
Genetically engineered seeds that resist disease and insects, or
that meet certain nutritional requirements, could affect the
demand for our crop nutrients and crop protection products.
Demand for fuel that we sell could decline as technology allows
for more efficient usage of equipment.

We operate some of our business through joint
ventures in which our rights to control business decisions are
limited.Several parts of our
business, including in particular, our agronomy business segment
and portions of our grain marketing, wheat milling and foods
businesses, are operated through joint ventures with third
parties. By operating a business through a joint venture, we
have less control over business decisions than we have in our
wholly-owned or majority-owned businesses. In particular, we
generally cannot act on major business initiatives in our joint
ventures without the consent of the other party or parties in
those ventures.




THE COMPANY

CHS Inc. (CHS or the Company) is one of the
nations leading integrated agricultural companies. As a
cooperative, the Company is owned by farmers and ranchers and
their local cooperatives from the Great Lakes to the Pacific
Northwest and from the Canadian border to Texas. The Company
also has preferred stockholders that own shares of the
Companys 8% Cumulative Redeemable Preferred Stock which is
listed on the NASDAQ National Market under the symbol CHSCP. On
August 31, 2004, the Company had 4,226,428 shares of
preferred stock outstanding. CHS buys commodities from and
provides products and services to its members and other
customers, both domestic and international. The Company provides
a wide variety of products and services, from initial
agricultural inputs such as fuels, farm supplies, crop

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nutrients and crop protection products, to
agricultural outputs that include grains and oilseeds, grain and
oilseed processing and food products. A portion of the
Companys operations are conducted through equity
investments and joint ventures whose operating results are not
fully consolidated with the Companys results; rather, a
proportionate share of the income or loss from those entities is
included as a component in the Companys net income under
the equity method of accounting. For the fiscal year ended
August 31, 2004, the Companys total revenues were
$11.1 billion, and net income was $221.3 million.


The Companys operations are organized into
five business segments: Agronomy, Energy, Country Operations and
Services, Grain Marketing and Processed Grains and Foods.
Together these business segments create vertical integration to
link producers with consumers. The first two segments, Agronomy
and Energy, produce and provide for the wholesale distribution
of crop production inputs. The third segment, Country Operations
and Services, serves as the Company-owned retailer of a portion
of these crop inputs and also serves as the first handler of a
significant portion of the crops marketed and processed by the
Company. The fourth segment, Grain Marketing, purchases and
resells grains and oilseeds originated by the Country Operations
and Services segment, by member cooperatives and also by third
parties. The fifth business segment, Processed Grains and Foods,
converts grains and oilseeds into value-added products.

Only producers of agricultural products and
associations of producers of agricultural products may be
members of CHS. The Companys earnings derived from
cooperative business are allocated to patrons based on the
volume of business they do with the Company. The Company
allocates these earnings to its members in the form of patronage
refunds (which are also called patronage dividends) in cash and
patrons equities, which may be redeemed over time.
Earnings derived from non-members, which are not allocated
patronage are taxed at regular corporate rates and are retained
by the Company as unallocated capital reserve. The Company also
receives patronage refunds from the cooperatives in which it is
a member, if those cooperatives have earnings to distribute and
the Company qualifies for patronage refunds from them.

The origins of CHS date back to the early 1930s
with the founding of the predecessor companies of Cenex, Inc.
and Harvest States Cooperatives. CHS emerged as the result of
the merger of the two entities in 1998, and is headquartered in
Inver Grove Heights, Minnesota. In August 2003, the Company
changed its name from Cenex Harvest States Cooperatives to CHS
Inc.

The international sales information and segment
information in Notes 2 and 11 to the consolidated financial
statements are incorporated by reference into the following
business segment descriptions.

The business segment financial information
presented below does not represent the results that would have
been obtained had the relevant business segment been operated as
an independent business.




AGRONOMY

Overview


Through the Agronomy business segment, the
Company is engaged in the manufacture of crop nutrients and the
wholesale distribution of crop nutrients and crop protection
products. The Company conducts its agronomy operations primarily
through two investments  a 20% cooperative ownership
interest in CF Industries, Inc. (CF Industries) and, effective
May 1, 2004, a 50% ownership interest in Agriliance, LLC
(Agriliance). CF Industries manufactures crop nutrient products,
particularly nitrogen and phosphate fertilizers, and is one of
the largest suppliers to Agriliance. Agriliance is one of North
Americas largest wholesale distributors of crop nutrients,
crop protection products and other agronomy products based on
sales.

There is significant seasonality in the sale of
crop nutrients and crop protection products and services, with
peak activity coinciding with the planting and input seasons.

The Companys minority ownership interest in
CF Industries and 50% ownership interest in Agriliance are
treated as investments, and therefore, those entities
revenues and expenses are not reflected in the Companys
operating results. The Companys interest in CF Industries
is treated as a cost method

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investment and its interest in Agriliance is
treated as an equity method investment. CF Industries and
Agriliance each have their own line of financing, without
recourse to the Company.


Operations

CF Industries.CF
Industries is an interregional agricultural cooperative involved
in the manufacturing of crop nutrient products. It is one of
North Americas largest producers of nitrogen and phosphate
fertilizers. Through its members, CF Industries nitrogen
and phosphate fertilizer products reach farmers and ranchers in
48 states and two Canadian provinces. CF Industries
conducts its operations primarily from the following facilities:



| |   |                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------
| |  | a nitrogen manufacturing and processing facility
    at Donaldsonville, Louisiana;                             
|
| |  | a phosphate mine and phosphate fertilizer plant
    in central Florida; and                                    
|
| |  | a 66% ownership interest in a nitrogen fertilizer
    manufacturing and processing facility in Alberta, Canada.

Agriliance.Agriliance is one of the nations largest wholesale
distributors of crop nutrients (fertilizers) and crop protection
products (insecticides, fungicides and pesticides)based on
sales, accounting for an estimated 17% of the U.S. market
for crop nutrients and approximately 24% of the U.S. market
for crop protection products. As a wholesale distributor,
Agriliance has warehouse, distribution and service facilities
located throughout the country. Agriliance also owns and
operates retail agricultural units primarily in the southern
United States. In addition, Agriliance blends and packages crop
protection products under the Agri Solutions brand. Agriliance
purchased approximately 34% of its fertilizer from CF Industries
during fiscal year 2004, and its other suppliers include IMC,
PCS, PIC and Koch. Most of Agriliances crop protection
products are purchased from Monsanto, Syngenta, Dow, Bayer,
Dupont and BASF.

Agriliance was formed in 2000 when CHS, Farmland
Industries Inc. (Farmland) and Land OLakes, Inc. (Land
OLakes) contributed their respective agronomy businesses
to the new company in consideration for ownership interests in
the venture. CHS holds its interests in Agriliance through
United Country Brands, LLC (UCB), a wholly-owned holding company.

In April 2003, CHS acquired a 13.1% additional
economic interest in the crop protection products business of
Agriliance (the CPP Business) for a cash payment of
$34.3 million. After the transaction, the economic
interests in Agriliance were owned 50% by Land OLakes, 25%
plus an additional 13.1% of the CPP Business by CHS and 25% less
13.1% of the CPP Business by Farmland. The ownership or
governance interests in Agriliance did not change with the
purchase of this additional economic interest. Agriliances
earnings were split among the members based upon the respective
economic interests of each member.

On April 30, 2004, the Company purchased all
of Farmlands remaining interests in Agriliance and UCB for
$27.5 million in cash. The Company now owns 50% of the
economic and governance interests in Agriliance. The Company
continues to account for the investment using the equity method
of accounting.

Products and Services

CF Industries manufactures crop nutrient
products, primarily nitrogen and phosphate fertilizers and
potash. Agriliance wholesales and retails crop nutrient products
and crop protection products that include insecticides,
fungicides, and pesticides. In addition, Agriliance blends and
packages 7% of the products it sells under the Agri
Solutions brand. Agriliance also provides field and technical
services, including soil testing, adjuvant and herbicide
formulation, application and related services.

Sales and Marketing; Customers

CF Industries sells its crop nutrient products to
large agricultural cooperatives and distributors. Its largest
customers are Land OLakes, CHS and seven other regional
cooperatives that wholesale the

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products to their members. Agriliance distributes
agronomy products through approximately 2,200 local cooperatives
from Ohio to the West Coast and from the Canadian border south
to Kansas. Agriliance also provides sales and services through
48 Agriliance Service Centers and other retail outlets.
Agriliances largest customer is the Companys Country
Operations and Services business segment. In 2004, Agriliance
sold approximately $1.2 billion of crop nutrient products
and approximately $2.3 billion of crop protection and other
products.


Industry; Competition

Regulation.The
Agronomy business segments operations are subject to laws
and related regulations and rules designed to protect the
environment that are administered by the Environmental
Protection Agency, the Department of Transportation and similar
government agencies. These laws, regulations and rules govern
the discharge of materials to environment, air and water;
reporting storage of hazardous wastes; the transportation,
handling and disposition of wastes; and the labeling of
pesticides and similar substances. Failure to comply with these
laws, regulations and rules could subject CF Industries,
Agriliance or CHS to administrative penalties, injunctive
relief, civil remedies and possible recalls of products. CHS
believes that CF Industries and Agriliance are in compliance
with these laws, regulations and rules in all material respects
and does not expect continued compliance to have a material
effect on its capital expenditures, earnings or competitive
position.

CF Industries.North
American fertilizer producers operate in a highly competitive,
global industry. Commercial fertilizers are world-traded
commodities and producers compete principally on the basis of
price and service. Many of the raw materials that are used in
fertilizer production, such as natural gas, are often more
expensive in the U.S. than other parts of the world. Crop
nutrient margins and earnings have historically been cyclical;
large profits generated throughout the mid-1990s attracted
additional capital and expansion and the industry now suffers
from excess capacity. These factors have produced depressed
margins for North American fertilizer manufacturers over the
past several years, although recently fertilizer margins have
stabilized.

CF Industries competes with numerous domestic and
international crop nutrient manufacturers.

Agriliance.The
wholesale and retail distribution of agronomy products is highly
competitive and dependent upon relationships with agricultural
producers, local cooperatives and growers, proximity to
producers and local cooperatives and competitive pricing.
Moreover, the crop protection products industry is mature with
slow growth predicted for the future, which has led distributors
and suppliers to turn to consolidation and strategic
partnerships to benefit from economies of scale and increased
market share. Agriliance competes with other large agronomy
distributors, as well as other regional or local distributors
and retailers. Agriliance competes on the strength of its
relationships with the members of the Company and members of
Land OLakes, its purchasing power and competitive pricing,
and its attention to service in the field.

Major competitors of Agriliance in crop nutrient
distribution include Agrium, Cargill, Koch, UAP and United
Suppliers. Major competitors of Agriliance in crop protection
products distribution include Helena, UAP, Tenkoz and numerous
smaller distribution companies.

Summary Operating Results

The Company accounts for its Agronomy business
segment as follows:

CF Industries.The
Companys investment in CF Industries of $153 million
on August 31, 2004 is carried on the balance sheet at cost,
including allocated qualified patronage. Since CF Industries is
a cooperative, the Company recognizes income from the investment
only if it receives qualified patronage refunds. In each of the
years 1998 through 2003, CF Industries generated operating
losses, none of which were allocated to its owners.
Historically, crop nutrients manufacturing earnings have been
cyclical in nature. CHS management has performed the appropriate
impairment tests of this investment, and based upon those tests,
believes that fair market value exceeds its carrying value. The
Company will continue to

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perform impairment tests annually, including
reviewing operating results, or as circumstances dictate, which
could result in an impairment to its CF Industries investment.


Agriliance.At
August 31, 2004 the Companys equity investment in
Agriliance was $167.6 million. The Company recognizes
earnings from Agriliance using the equity method of accounting,
which results in the Company including its ownership percentage
of Agriliances net earnings as equity income from
investments. The Company applies related internal expenses
against those earnings.

Summary operating results and identifiable assets
for the Agronomy business segment for the fiscal years ended
August 31, 2004, 2003 and 2002 are shown below:

|                                          |                |                        |         |      |   |      |         |     |   |   |         |     |  
|----------------------------------------- | -------------- | ---------------------- | ------- | ---- | - | ---- | ------- | --- | - | - | ------- | --- | -
|                                          |                | 2004                   |         | 2003 |   | 2002
|                                          |                |                        |         |      |   |     
|                                          |                |                       
|                                          |                | (dollars in thousands)
|Revenues:                                 |                |                        |         |      |   |      |         |     |   |   |         |    
|                                          | Net sales      |                        |         |      |   |      |         |     |   |   |         |     |  
|                                          | Other revenues |                        | $       | (15  | ) |      | $       | (84 | ) |   | $       | (89 | )
|                                          |                |                        |         |      |   |      |         |     |   |   |         |    
|                                          |                |                        | (15     | )    |   |      | (84     | )   |   |   | (89     | )  
|Cost of goods sold                        |                |                        |         |      |   |      |         |     |   |   |         |    
|Marketing, general and administrative     |                |                        | 8,482   |      |   |      | 8,138   |     |   |   | 8,957   |    
|                                          |                |                        |         |      |   |      |         |     |   |   |         |    
|Operating losses                          |                |                        | (8,497  | )    |   |      | (8,222  | )   |   |   | (9,046  | )  
|Interest                                  |                |                        | (352    | )    |   |      | (974    | )   |   |   | (1,403  | )  
|Equity income from investments            |                |                        | (35,725 | )    |   |      | (20,773 | )   |   |   | (13,425 | )  
|                                          |                |                        |         |      |   |      |         |     |   |   |         |    
|Income before income taxes                |                | $                      | 27,580  |      |   | $    | 13,525  |     |   | $ | 5,782   |    
|                                          |                |                        |         |      |   |      |         |     |   |   |         |    
|Total identifiable assets 
    August 31 |                | $                      | 327,448 |      |   | $    | 285,906 |     |   | $ | 242,015 |    
|                                          |                |                        |         |      |   |      |         |     |   |   |         |    




ENERGY

Overview

CHS is the nations largest cooperative
energy company based on revenues and identifiable assets, with
operations that include petroleum refining and pipelines; the
supply, marketing and distribution of refined fuels (gasoline,
diesel, and other energy products); the blending, sale and
distribution of lubricants; and the wholesale supply of propane.
The Energy business segment processes crude oil into refined
petroleum products at refineries in Laurel, Montana
(wholly-owned) and McPherson, Kansas (an entity in which CHS has
an approximately 74.5% ownership interest) and sells those
products under the Cenex brand to member cooperatives and others
through a network of approximately 1,600 independent retail
sites, including approximately 800 that operate Cenex/ Ampride
convenience stores.

Operations

Laurel Refinery.The
Companys Laurel, Montana refinery processes medium and
high sulfur crude oil into refined petroleum products that
primarily include gasoline, diesel, and asphalt. The Laurel
refinery sources approximately 90% of its crude oil supply from
Canada, with the balance obtained from domestic sources. Laurel
has access to Canadian and northwest Montana crude through the
Companys wholly-owned Front Range Pipeline, LLC and other
common carrier pipelines. The Laurel refinery also has access to
Wyoming crude via common carrier pipelines from the south.

The Laurel facility processes approximately
55,000 barrels of crude oil per day to produce refined
products that consist of approximately 42% gasoline, 30% diesel
and other distillates and 28% asphalt and other residual
products. Refined fuels produced at Laurel, Montana are
available via the Yellowstone Pipeline to western Montana
terminals and to Spokane and Moses Lake, Washington, south via
common

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carrier pipelines to Wyoming terminals and
Denver, Colorado, and east via the Companys wholly-owned
Cenex Pipeline, LLC to Glendive, Montana, and Minot and Fargo,
North Dakota.


McPherson Refinery.The McPherson, Kansas refinery is owned and operated by the
National Cooperative Refinery Association (NCRA), of which the
Company owns approximately 74.5%. The McPherson refinery
processes low and medium sulfur crude oil into gasoline, diesel
and other distillates, propane, and other products. McPherson
sources approximately 95% of its crude oil from Kansas,
Oklahoma, and Texas through NCRA-owned and common carrier
pipelines.

The McPherson refinery processes approximately
80,000 barrels of crude oil per day to produce refined
products that consist of approximately 57% gasoline, 34% diesel
and other distillates, and 9% propane and other products.
Approximately 90% of the refined fuels are shipped via
NCRAs proprietary products pipeline to its terminal in
Council Bluffs, Iowa and to other markets via common carrier
pipelines. The remaining refined fuel products are loaded into
trucks at the refinery.

Other Energy
Operations.The Company owns and
operates a propane terminal, four asphalt terminals and three
lubricants blending and packaging facilities. The Company also
owns and leases a fleet of liquid and pressure trailers and
tractors, which are used to transport refined fuels, propane,
anhydrous ammonia and other products.

Products and Services

The Energy business segment produces and sells
(primarily wholesale) gasoline, diesel, propane, asphalt,
lubricants, and other related products and provides
transportation services. It obtains the petroleum products that
it sells both from the Laurel and McPherson refineries and from
third parties.

Sales and Marketing; Customers

The Company makes approximately 70% of its
refined fuel sales to members, with the balance sold to
non-members. Sales are made wholesale to member cooperatives and
through a network of independent retailers that operate
convenience stores under the Cenex/ Ampride tradename. The
Company sold approximately 1.4 billion gallons of gasoline
and approximately 1.3 billion gallons of diesel fuel in
fiscal year 2004. The Company also blends, packages and
wholesales auto and farm machinery lubricants to both members
and non-members. In fiscal year 2004, energy operations sold
approximately 21 million gallons of lube oil. The Company
is one of the nations largest propane wholesalers based on
revenues. In fiscal year 2004, energy operations sold
approximately 766 million gallons of propane. Most of the
propane sold in rural areas is for heating and agricultural
usage. Annual sales volumes of propane vary greatly depending on
weather patterns and crop conditions.

Industry; Competition

Regulation.Governmental regulations and policies, particularly in the areas
of taxation, energy and the environment, have a significant
impact on the Companys Energy business segment. The Energy
business segments operations are subject to laws and
related regulations and rules designed to protect the
environment that are administered by the Environmental
Protection Agency, the Department of Transportation and similar
government agencies. These laws, regulations and rules govern
the discharge of materials to environment, air and water;
reporting storage of hazardous wastes; the transportation,
handling and disposition of wastes; and the labeling of
pesticides and similar substances. Failure to comply with these
laws, regulations and rules could subject CHS (and, in the case
of the McPherson refinery, NCRA) to administrative penalties,
injunctive relief, civil remedies and possible recalls of
products. CHS believes that it and NCRA are in compliance with
these laws, regulations and rules in all material respects and
does not expect continued compliance to have a material effect
on capital expenditures, earnings or competitive position of
either CHS or NCRA.

Like many other refineries, the Energy business
segments refineries are currently focusing their capital
spending on reducing pollution. In particular, these refineries
are currently working to comply with

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the Environmental Protection Agency low sulfur
fuel regulations required by 2006, which are intended to lower
the sulfur content of gasoline and diesel. The Company currently
expects that the cost of compliance will be approximately
$87.0 million for the Companys Laurel, Montana
refinery and $311.0 million for NCRAs McPherson,
Kansas refinery, of which $49.2 million had been spent at
the Laurel refinery and $131.0 million had been spent by
NCRA at the McPherson refinery as of August 31, 2004. The
Company expects all of these compliance capital expenditures at
the refineries to be complete by December 31, 2005, and
anticipates funding these projects with a combination of cash
flows from operations and debt proceeds.


The energy business is highly cyclical. Demand
for crude oil and energy products are driven by the condition of
local and worldwide economies, local and regional weather
patterns and taxation relative to other energy sources which can
significantly affect the price of refined fuels products. Most
of the Companys energy product market is located in rural
areas, so sales activity tends to follow the planting and
harvesting cycles. More fuel-efficient equipment, reduced crop
tillage, depressed prices for crops, weather conditions, and
government programs, which encourage idle acres, may all reduce
demand for the Companys energy products.

The refining and wholesale fuels business is very
competitive. Among the Companys competitors are some of
the worlds largest integrated petroleum companies, which
have their own crude oil supplies, distribution and marketing
systems. The Company also competes with smaller domestic
refiners and marketers in the midwestern and northwestern United
States, with foreign refiners who import products into the
United States and with producers and marketers in other
industries supplying other forms of energy and fuels to
consumers. Given the commodity nature of the end products,
profitability in the refining and marketing industry depends
largely on margins, as well as operating efficiency, product
mix, and costs of product distribution and transportation. The
retail gasoline market is highly competitive, with much larger
competitors that have greater brand recognition and distribution
outlets throughout the country and the world. CHS owned and
non-owned retail outlets are located primarily in the
northwestern, midwestern and southern United States.

Summary Operating Results

Summary operating results and identifiable assets
for the Energy business segment for the fiscal years ended
August 31, 2004, 2003 and 2002 are shown below:

|                                          |                |                        |           |           |  |      |           |           |  |   |           |           | 
|----------------------------------------- | -------------- | ---------------------- | --------- | --------- |  | ---- | --------- | --------- |  | - | --------- | --------- | 
|                                          |                | 2004                   |           | 2003      |  | 2002
|                                          |                |                        |           |           |  |     
|                                          |                |                       
|                                          |                | (dollars in thousands)
|Revenues:                                 |                |                        |           |           |  |      |           |           |  |   |           |          
|                                          | Net sales      |                        | $         | 4,028,248 |  |      | $         | 3,648,093 |  |   | $         | 2,657,689 | 
|                                          | Other revenues |                        |           | 9,193     |  |      |           | 5,655     |  |   |           | 857       | 
|                                          |                |                        |           |           |  |      |           |           |  |   |           |          
|                                          |                |                        | 4,037,441 |           |  |      | 3,653,748 |           |  |   | 2,658,546 |          
|Cost of goods sold                        |                |                        | 3,784,260 |           |  |      | 3,470,726 |           |  |   | 2,483,359 |          
|Marketing, general and administrative     |                |                        | 66,493    |           |  |      | 63,740    |           |  |   | 66,731    |          
|                                          |                |                        |           |           |  |      |           |           |  |   |           |          
|Operating earnings                        |                |                        | 186,688   |           |  |      | 119,282   |           |  |   | 108,456   |          
|Gain on sale of investment                |                |                        | (14,666   | )         |  |      |           |           |  |   |           |          
|Interest                                  |                |                        | 13,819    |           |  |      | 16,401    |           |  |   | 16,875    |          
|Equity (income) loss from investments     |                |                        | (1,399    | )         |  |      | (1,353    | )         |  |   | 1,166     |          
|Minority interests                        |                |                        | 32,507    |           |  |      | 20,782    |           |  |   | 14,604    |          
|                                          |                |                        |           |           |  |      |           |           |  |   |           |          
|Income before income taxes                |                | $                      | 156,427   |           |  | $    | 83,452    |           |  | $ | 75,811    |          
|                                          |                |                        |           |           |  |      |           |           |  |   |           |          
|Intersegment sales                        |                | $                      | (121,199  | )         |  | $    | (94,209   | )         |  | $ | (67,367   | )        
|                                          |                |                        |           |           |  |      |           |           |  |   |           |          
|Total identifiable assets 
    August 31 |                | $                      | 1,591,254 |           |  | $    | 1,449,652 |           |  | $ | 1,305,828 |          
|                                          |                |                        |           |           |  |      |           |           |  |   |           |          

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COUNTRY OPERATIONS AND SERVICES

Overview

The Country Operations and Services business
segment purchases a variety of grains from the Companys
producer members and other third parties, and provides
cooperative members and producers with access to a full range of
products and services including farm supplies, programs for crop
and livestock production, hedging and insurance services, and
agricultural operations financing. Country Operations and
Services operates at 289 locations dispersed throughout
Minnesota, North Dakota, South Dakota, Nebraska, Montana, Idaho,
Washington and Oregon. Most of these locations purchase grain
from farmers and sell agronomy products, energy products and
feed to those same producers and others, although not all
locations provide every product and service.

Products and Services

Grain Purchasing.The Company is one of the largest country elevator operators in
North America based on revenues. Through a majority of its
elevator locations, the Country Operations and Services business
segment purchases grain from member and non-member producers and
other elevators and grain dealers. Most of the grain purchased
is either sold through the Companys Grain Marketing
business segment or used for local feed and processing
operations. For the year ended August 31, 2004, the Country
Operations and Services business segment purchased approximately
318 million bushels of grain, primarily wheat
(140 million bushels), corn (90 million bushels) and
soybeans (47 million bushels). Of these bushels,
267 million were purchased from members and
248 million were sold through the Grain Marketing business
segment.

Other Products.Country Operations and Services manufactures and sells other
products, both directly and through ownership interests in other
entities. These include seed; crop nutrients; energy products;
animal feed ingredients, supplements and products; animal health
products; crop protection products; and processed sunflowers.
The Company sells agronomy products at 160 locations, feed
products at 126 locations and energy products at
103 locations.

Financial Services.The Company has provided open account financing to more than
130 CHS members that are cooperatives (cooperative
association members) in the past year. These arrangements
involve the discretionary extension of credit in the form of
term and seasonal loans and can also be used as a clearing
account for settlement of grain purchases and as a cash
management tool. A substantial part of the term and seasonal
loans are sold to the National Bank for Cooperatives (CoBank),
with CoBank purchasing up to 100% of any loan. The
Companys guarantee exposure on these loans at
August 31, 2004 was approximately $5.9 million.
Through its wholly-owned subsidiary Fin-Ag, Inc. the Company
provides seasonal cattle feeding and swine financing loans,
facility financing loans and crop production loans. Most loans
are sold to Pro Partners (an affiliate of CoBank) under a
program separate from that described above, under which the
Company has guaranteed a portion of the loans. The
Companys exposure at August 31, 2004 was
approximately $25.1 million. The Companys borrowing
arrangements allow for the Company to retain up to
$110.0 million of loans in aggregate for both finance
programs, or to sell the loans and extend guarantees up to
$150.0 million in aggregate.

The Companys wholly-owned subsidiary
Country Hedging, Inc. (Country Hedging), which is a registered
futures commission merchant and a clearing member of both the
Minneapolis Grain Exchange and the Kansas City Board of Trade,
is a full-service commodity futures and options broker.

Ag States Agency, LLC (Ag States), is an
independent insurance agency in which the Company holds a
majority ownership interest. It sells insurance, including group
benefits, property and casualty, and bonding programs. Its
approximately 1,600 customers are primarily agricultural
businesses, including local cooperatives and independent
elevators, petroleum outlets, agronomy, feed and seed plants,
implement dealers, fruit and vegetable packers/ warehouses, and
food processors.

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Industry; Competition

Regulation.The
Country Operations and Services business segments
operations are subject to laws and related regulations and rules
designed to protect the environment that are administered by the
Environmental Protection Agency, the Department of
Transportation and similar government agencies. These laws,
regulations and rules govern the discharge of materials to
environment, air and water; reporting storage of hazardous
wastes; the transportation, handling and disposition of wastes;
and the labeling of pesticides and similar substances. The
Country Operations and Services business segments
operations are also subject to laws and related regulations and
rules administered by the United States Department of
Agriculture, the Federal Food and Drug Administration, and other
federal, state, local and foreign governmental agencies that
govern the processing, packaging, storage, distribution,
advertising, labeling, quality and safety of feed and grain
products. Failure to comply with these laws, regulations and
rules could subject CHS to administrative penalties, injunctive
relief, civil remedies and possible recalls of products. CHS
believes that it is in compliance with these laws, regulations
and rules in all material respects and does not expect continued
compliance to have a material effect on its capital
expenditures, earnings or competitive position.

Competition.Competitors for the purchase of grain include other elevators
and large grain marketing companies. Competitors for farm supply
include a variety of cooperatives, privately held and large
national companies. The Company competes primarily on the basis
of price, services and patronage.

Competitors to the Companys financing
operations are primarily other financial institutions. The
Company competes primarily on the basis of price, services and
patronage. Country Hedgings competitors include
international brokerage firms, national brokerage firms,
regional brokerage firms (both cooperatives and
non-cooperatives) as well as local introducing brokers, with
competition driven by price and level of service. Ag States
competes with other insurance agencies, primarily on the basis
of price and services.

Summary Operating Results

Summary operating results and identifiable assets
for the Country Operations and Services business segment for the
fiscal years ended August 31, 2004, 2003 and 2002 are shown
below:

|                                          |                |                        |           |           |  |      |           |           |  |   |           |           | 
|----------------------------------------- | -------------- | ---------------------- | --------- | --------- |  | ---- | --------- | --------- |  | - | --------- | --------- | 
|                                          |                | 2004                   |           | 2003      |  | 2002
|                                          |                |                        |           |           |  |     
|                                          |                |                       
|                                          |                | (dollars in thousands)
|Revenues:                                 |                |                        |           |           |  |      |           |           |  |   |           |          
|                                          | Net sales      |                        | $         | 2,227,764 |  |      | $         | 1,885,825 |  |   | $         | 1,474,553 | 
|                                          | Other revenues |                        |           | 94,381    |  |      |           | 84,206    |  |   |           | 83,361    | 
|                                          |                |                        |           |           |  |      |           |           |  |   |           |          
|                                          |                |                        | 2,322,145 |           |  |      | 1,970,031 |           |  |   | 1,557,914 |          
|Cost of goods sold                        |                |                        | 2,199,700 |           |  |      | 1,876,811 |           |  |   | 1,474,392 |          
|Marketing, general and administrative     |                |                        | 70,196    |           |  |      | 55,887    |           |  |   | 47,995    |          
|                                          |                |                        |           |           |  |      |           |           |  |   |           |          
|Operating earnings                        |                |                        | 52,249    |           |  |      | 37,333    |           |  |   | 35,527    |          
|Gain on legal settlements                 |                |                        | (692      | )         |  |      | (10,867   | )         |  |   | (2,970    | )        
|Interest                                  |                |                        | 16,019    |           |  |      | 14,975    |           |  |   | 13,851    |          
|Equity income from investments            |                |                        | (519      | )         |  |      | (788      | )         |  |   | (283      | )        
|Minority interests                        |                |                        | 1,323     |           |  |      | 1,168     |           |  |   | 786       |          
|                                          |                |                        |           |           |  |      |           |           |  |   |           |          
|Income before income taxes                |                | $                      | 36,118    |           |  | $    | 32,845    |           |  | $ | 24,143    |          
|                                          |                |                        |           |           |  |      |           |           |  |   |           |          
|Intersegment sales                        |                | $                      | (987,145  | )         |  | $    | (796,999  | )         |  | $ | (615,853  | )        
|                                          |                |                        |           |           |  |      |           |           |  |   |           |          
|Total identifiable assets 
    August 31 |                | $                      | 862,645   |           |  | $    | 857,523   |           |  | $ | 799,711   |          
|                                          |                |                        |           |           |  |      |           |           |  |   |           |          

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GRAIN MARKETING

Overview

CHS is the nations largest cooperative
marketer of grain and oilseed based on grain storage capacity
and grain sales, handling about 1.1 billion bushels
annually. During fiscal year 2004, the Company purchased
approximately 69% of its total grain volumes from individual and
cooperative association members and the Country Operations and
Services business segment, with the balance purchased from third
parties. CHS arranges for the transportation of the grains
either directly to customers or to Company owned or leased grain
terminals and elevators awaiting delivery to domestic and
foreign purchasers. The Company primarily conducts its Grain
Marketing operations directly, but does conduct some of its
business through two 50% owned joint ventures.

Operations

The Grain Marketing segment purchases grain
directly and indirectly from agricultural producers primarily in
the midwestern and western United States. The purchased grain is
typically contracted for sale for future delivery at a specified
location, with the Company responsible for handling the grain
and arranging for its transportation to that location. The sale
of grain is recorded after title to the commodity has
transferred and final weights, grades and settlement price have
been agreed upon. Amounts billed to the customer as part of a
sales transaction include the costs for shipping and handling.
The Companys ability to arrange efficient transportation,
including loading capabilities onto unit trains, ocean-going
vessels, and barges, is a significant part of the services it
offers to its customers. Rail, vessel, barge and truck
transportation is carried out by third parties, often under
long-term freight agreements with the Company. Grain intended
for export is usually shipped by rail or barge to an export
terminal, where it is loaded onto ocean-going vessels. Grain
intended for domestic use is usually shipped by rail or truck to
various locations throughout the country.

CHS owns export terminals, river terminals, and
elevators involved in the handling and transport of grain. River
terminals at St. Paul, Savage, and Winona, Minnesota, and
Davenport, Iowa are used to load grains onto barges for shipment
to both domestic and export customers via the Mississippi River
system. The Companys export terminal at Superior,
Wisconsin, provides access to the Great Lakes and
St. Lawrence Seaway, and an export terminal at Myrtle
Grove, Louisiana serves the Gulf market. In the Pacific
Northwest, the Company conducts its grain marketing operations
through United Harvest, LLC (a 50% joint venture with United
Grain Corporation), and TEMCO, LLC (a 50% joint venture with
Cargill, Incorporated). United Harvest, LLC operates grain
terminals in Vancouver and Kalama, Washington, and primarily
exports wheat. TEMCO, LLC, operates an export terminal in
Tacoma, Washington, and primarily exports corn and soybeans.
These facilities serve the Pacific market, as well as domestic
grain customers in the western United States. The Company also
owns two 110-car shuttle-receiving elevator facilities in
Friona, Texas and Collins, Mississippi that serve large-scale
feeder cattle, dairy and poultry producers in those regions. In
2003, the Company opened an office in Sao Paulo, Brazil,
for the procurement of soybeans for the Grain Marketing
segments international customers.

The Grain Marketing segment purchases most of its
grain during the summer and fall harvest period. Because of the
Companys geographic location and the fact that it is
further from its export facilities, grain tends to be sold later
than in other parts of the country. However, as many producers
have significant on-farm storage capacity and in light of the
Companys own storage capacity, the Grain Marketing
business segment buys and ships grain throughout the year. Due
to the amount of grain purchased and held in inventory, the
Grain Marketing business segment has significant working capital
needs at various times of the year. The amount of borrowings for
this purpose, and the interest rate charged on those borrowings,
directly affect the profitability of the Grain Marketing segment.

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Products and Services

The primary grains purchased by the Grain
Marketing business segment for the year ended August 31,
2004 were corn (456 million bushels), wheat
(389 million bushels) and soybeans (286 million
bushels). Of the total grains purchased by the Grain Marketing
business segment during the year ended August 31, 2004,
603 million bushels were purchased from the Companys
individual and cooperative association members, 248 million
bushels were purchased from the Country Operations and Services
business segment and the remainder were purchased from third
parties.

Sales and Marketing; Customers

Purchasers include domestic and foreign millers,
maltsters, feeders, crushers, and other processors. To a much
lesser extent purchasers include intermediaries and
distributors. Grain marketing operations are not dependent on
any one customer. The Grain Marketing segment has supply
relationships calling for delivery of grain at prevailing market
prices.

Industry; Competition

Regulation.The
Grain Marketing business segments operations are subject
to laws and related regulations and rules designed to protect
the environment that are administered by the Environmental
Protection Agency, the Department of Transportation and similar
government agencies. These laws, regulations and rules govern
the discharge of materials to environment, air and water;
reporting storage of hazardous wastes; the transportation,
handling and disposition of wastes. The Grain Marketing business
segments operations are also subject to laws and related
regulations and rules administered by the United States
Department of Agriculture, the Federal Food and Drug
Administration, and other federal state, local and foreign
governmental agencies that govern the processing, packaging,
storage, distribution, advertising, labeling, quality and safety
of food and grain products. Failure to comply with these laws,
regulations and rules could subject CHS to administrative
penalties, injunctive relief, civil remedies and possible
recalls of products. CHS believes that it is in compliance with
these laws, regulations and rules in all material respects and
does not expect continued compliance to have a material effect
on its capital expenditures, earnings or competitive position.

Competition.The
Grain Marketing business segment competes for both the purchase
and the sale of grain. Competition is intense and margins are
low. Some competitors are integrated food producers, which may
also be customers. A few major competitors have substantially
greater financial resources than the Company.

In the purchase of grain from producers, location
of the delivery facility is a prime consideration, but producers
are increasingly willing to truck grain longer distances for
sale. Price is affected by the capabilities of the facility; for
example, if it is cheaper to deliver to a customer by unit train
than by truck, a facility with unit train capability provides a
price advantage. The Company believes that its relationships
with individual members serviced by local Country Operations and
Services locations and with cooperative members gives it a broad
origination capability.

The Grain Marketing business segment competes for
grain sales based on price, services and ability to provide the
desired quantity and quality of grains. Location of facilities
is a major factor in the ability to compete. Grain marketing
operations compete with numerous grain merchandisers, including
major grain merchandising companies such as Archer Daniels
Midland (ADM), Cargill, Incorporated (Cargill), ConAgra, Bunge
and Louis Dreyfus, each of which handle grain volumes of more
than one billion bushels annually.

The results of the grain marketing business may
be adversely affected by relative levels of supply and demand,
both domestic and international, commodity price levels
(including grain prices reported on national markets) and
transportation costs and conditions. Supply is affected by
weather conditions, disease, insect damage, acreage planted and
government regulations and policies. Demand may be affected by
foreign governments and their programs, relationships of foreign
countries with the United States, the

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affluence of foreign countries, acts of war,
currency exchange fluctuations and substitution of commodities.
Demand may also be affected by changes in eating habits, by
population growth, and by increased or decreased per capita
consumption of some products.


Summary Operating Results

Summary operating results and identifiable assets
for the Grain Marketing business segment for the fiscal years
ended August 31, 2004, 2003 and 2002 are shown below:

|                                          |                |                        |           |           |  |      |           |           |  |   |           |           | 
|----------------------------------------- | -------------- | ---------------------- | --------- | --------- |  | ---- | --------- | --------- |  | - | --------- | --------- | 
|                                          |                | 2004                   |           | 2003      |  | 2002
|                                          |                |                        |           |           |  |     
|                                          |                |                       
|                                          |                | (dollars in thousands)
|Revenues:                                 |                |                        |           |           |  |      |           |           |  |   |           |          
|                                          | Net sales      |                        | $         | 5,006,029 |  |      | $         | 4,139,226 |  |   | $         | 3,281,469 | 
|                                          | Other revenues |                        |           | 28,710    |  |      |           | 25,676    |  |   |           | 22,399    | 
|                                          |                |                        |           |           |  |      |           |           |  |   |           |          
|                                          |                |                        | 5,034,739 |           |  |      | 4,164,902 |           |  |   | 3,303,868 |          
|Cost of goods sold                        |                |                        | 5,006,704 |           |  |      | 4,133,677 |           |  |   | 3,272,985 |          
|Marketing, general and administrative     |                |                        | 25,071    |           |  |      | 21,072    |           |  |   | 22,213    |          
|                                          |                |                        |           |           |  |      |           |           |  |   |           |          
|Operating earnings                        |                |                        | 2,964     |           |  |      | 10,153    |           |  |   | 8,670     |          
|Interest                                  |                |                        | 5,874     |           |  |      | 4,738     |           |  |   | 4,807     |          
|Equity (income) loss from investments     |                |                        | (11,413   | )         |  |      | 1,673     |           |  |   | (4,257    | )        
|                                          |                |                        |           |           |  |      |           |           |  |   |           |          
|Income before income taxes                |                | $                      | 8,503     |           |  | $    | 3,742     |           |  | $ | 8,120     |          
|                                          |                |                        |           |           |  |      |           |           |  |   |           |          
|Intersegment sales                        |                | $                      | (45,103   | )         |  | $    | (2,435    | )         |  | $ | (69,561   | )        
|                                          |                |                        |           |           |  |      |           |           |  |   |           |          
|Total identifiable assets 
    August 31 |                | $                      | 487,807   |           |  | $    | 450,415   |           |  | $ | 481,232   |          
|                                          |                |                        |           |           |  |      |           |           |  |   |           |          




PROCESSED GRAINS AND FOODS

Overview

The Processed Grains and Foods business segment
converts raw agricultural commodities into ingredients for
finished food products or into finished consumer food products.
The Company has focused on areas that allow it to utilize the
products supplied by member producers. These areas are oilseed
processing, wheat milling and foods.

Regulation.The
Processed Grains and Foods business segments operations
are subject to laws and related regulations and rules designed
to protect the environment that are administered by the
Environmental Protection Agency, the Department of
Transportation and similar government agencies. These laws,
regulations and rules govern the discharge of materials to
environment, air and water; reporting storage of hazardous
wastes; the transportation, handling and disposition of wastes.
The Processed Grains and Foods business segments
operations are also subject to laws and related regulations and
rules administered by the United States Department of
Agriculture, the Federal Food and Drug Administration, and other
federal state, local and foreign governmental agencies that
govern the processing, packaging, storage, distribution,
advertising, labeling, quality and safety of food and grain
products. Failure to comply with these laws, regulations and
rules could subject CHS or its foods partners to administrative
penalties, injunctive relief, civil remedies and possible
recalls of products. CHS believes that it is in compliance with
these laws, regulations and rules in all material respects and
does not expect continued compliance to have a material effect
on its capital expenditures, earnings or competitive position.



| |                   
| | ------------------
| | Oilseed Processing

The Companys oilseed processing operations
convert soybeans into soybean meal, soyflour, crude soyoil,
refined soybean oil and associated by-products. These operations
are conducted at a facility in

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Mankato, Minnesota that can crush 39 million
bushels of soybeans on an annual basis, producing approximately
940,000 short tons of soybean meal and 460 million
pounds of crude soybean oil. The same facility is able to
produce approximately 1 billion pounds of refined soybean
oil annually. Another crushing facility in Fairmont, Minnesota
has a crushing capacity and crude soyoil output similar to the
Mankato facility. The facility in Fairmont became operational in
the first quarter of fiscal 2004.


The Companys oilseed processing operations
produce three primary products: refined oils, soybean meal and
soyflour. Refined oils are used in processed foods, such as
margarine, shortening, salad dressings and baked goods and, to a
lesser extent for certain industrial uses for plastics, inks and
paints. Soybean meal has a high-protein content and is used for
feeding livestock. Soyflour is used in the baking industry, as a
milk replacement in animal feed and in industrial applications.

The Companys soy processing facilities are
located in areas with a strong production base of soybeans and
end-user market for the meal and soyflour. The Company purchases
virtually all of its soybeans from members. The oilseed crushing
operations currently produce approximately 85% of the crude oil
that the Company refines, and purchases the balance from outside
suppliers.

The Companys customers for refined oil are
principally large food product companies located throughout the
United States. However, over 50% of the customers are
located in the Midwest due to lower freight costs and slightly
higher profitability potential. The largest customer for refined
oil products is Ventura Foods, LLC (Ventura Foods), in which the
Company holds a 50% ownership interest and with which the
Company has a long-term supply agreement to supply minimum
quantities of edible soybean oils as long as the Company
maintains a minimum 25.5% ownership interest and the
Companys price is comparative with other suppliers of the
product. The Companys sales to Ventura Foods were
$94.5 million in fiscal year 2004. The Company also sells
soymeal to almost 600 customers, primarily feed lots and
feed mills in southern Minnesota. Land OLakes/ Purina
Feed, LLC accounts for 18% of soymeal sold and Commodity
Specialists Company accounts for 22% of soymeal sold. The
Company sells soyflour to customers in the baking industry both
domestically and for export.

The refined soybean products industry is highly
competitive. Major industry competitors include ADM, Cargill,
Ag Processing, Inc., and Bunge. These and other competitors
have acquired other processors and have expanded existing
plants, or have constructed new plants, both domestically and
internationally. Price, transportation costs, services and
product quality drive competition. The Company estimates that it
has a market share of approximately 4% to 5% of the domestic
refined soybean oil market and approximately 4% of the domestic
soybean crushing capacity.

Soybeans are a commodity and their price can
fluctuate significantly depending on production levels, demand
for the refined products, and other supply and demand factors.



| |              
| | -------------
| | Wheat Milling

In January 2002, the Company and Cargill formed
Horizon Milling, LLC (Horizon Milling), in which the Company
owns 24% and Cargill owns the remaining 76%. Horizon Milling is
the largest U.S. wheat miller. Sales and purchases of wheat
and durum by the Company to Horizon Milling during fiscal year
2004 were $206.2 million and $2.9 million,
respectively. Horizon Millings advance payments on grain
to the Company were $7.1 million on August 31, 2004,
and are included in Customer Advance Payments on the
Companys Consolidated Balance Sheets.

The Company leases five mills to Horizon
Milling and ceased operations at its Huron, Ohio, mill prior to
the formation of Horizon Milling. The Company has dismantled the
milling equipment at Huron, and is currently pursuing the sale
of the equipment that has not yet been sold. The Processed
Grains and Foods business segment carries an impairment of
approximately $5.7 million on the equipment.

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| |      
| | -----
| | Foods

The Company has two primary areas of focus in the
foods area: Ventura Foods, LLC (Ventura Foods) which produces
oilseed-based products such as margarine and salad dressing, and
which is 50% owned by the Company, and the production of Mexican
foods such as tortillas, tortilla chips and entrees.

Ventura Foods.Ventura Foods manufactures, packages, distributes and markets
bulk margarine, salad dressings, mayonnaise, salad oils, syrups,
soup bases and sauces, many of which utilize soybean oil as a
primary ingredient. Approximately 40% of Ventura Foods
volume, based on sales revenues, comes from products for which
Ventura Foods owns the brand, and the remainder comes from
products that it produces for third parties. A variety of
Ventura Foods product formulations and processes are
proprietary to it or its customers. Ventura Foods is the largest
manufacturer of margarine in the U.S. and is a major producer of
many other products.

Ventura Foods has 13 manufacturing and
distribution locations across the United States. It sources its
raw materials, which consist primarily of soybean oil, canola
oil, cottonseed oil, peanut oil and various other ingredients
and supplies, from various national suppliers, including the
Companys oilseed processing operations. It sells the
products it manufactures to third parties as a contract
manufacturer, as well as directly to retailers, food
distribution companies and large institutional food service
companies. Ventura Foods sales are approximately 60% in
foodservice and the remainder split between retail and
industrial customers who use edible oil products as ingredients
in foods they manufacture for resale. During Ventura Foods
2004 fiscal year, Sysco accounted for 23% of net sales.

Ventura Foods competes with a variety of large
companies in the food manufacturing industry. Some of its major
competitors are ADM, Cargill, Bunge, Unilever, ConAgra, ACH,
Smuckers, Kraft, and CF Sauer.

Ventura Foods was created in 1996 and at the time
was owned 40% by the Company and 60% by Wilsey Foods, Inc., a
majority owned subsidiary of Mitsui & Co., Ltd. In
March 2000, the Company purchased an additional 10%
interest from Wilsey Foods, Inc. bringing the Companys
total equity investment in Ventura Foods to 50%. The Company
accounts for the Ventura Foods investment under the equity
method of accounting. At August 31, 2004 the Companys
equity investment in Ventura Foods was $107.7 million.

Mexican Foods.Through its Mexican foods operations, the Company manufactures,
packages, and distributes tortillas, tortilla chips and prepared
frozen Mexican food products such as burritos and tamales. Sales
are to both retail and food service customers. The Company sells
these products under a variety of local and regional brand names
and also produces private label products and co-packs for
customers. The current operational focus is on establishing
profitability and operational efficiency.

The tortilla and tortilla chip industry in the
United States is comprised of a large number of small regional
manufacturers and a few dominant manufacturers. The Company
estimates that its Mexican foods operation has approximately a
1.5% share of the national tortilla market and less than a 1%
share of the national tortilla chip market. On a national basis,
the primary competitors are large chip and snack companies such
as Frito Lay. During the Companys fiscal year ended
August 31, 2004, U.S. Foods accounted for 13% of
Mexican foods net sales and Sysco accounted for 11% of net
sales.

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Summary Operating Results

Summary operating results and identifiable assets
for the Processed Grains and Foods business segment for the
fiscal years ended August 31, 2004, 2003 and 2002 are shown
below:

|                                          |                |                        |         |         |  |      |         |         |  |   |         |         |  
|----------------------------------------- | -------------- | ---------------------- | ------- | ------- |  | ---- | ------- | ------- |  | - | ------- | ------- | -
|                                          |                | 2004                   |         | 2003    |  | 2002
|                                          |                |                        |         |         |  |     
|                                          |                |                       
|                                          |                | (dollars in thousands)
|Revenues:                                 |                |                        |         |         |  |      |         |         |  |   |         |        
|                                          | Net sales*     |                        | $       | 802,102 |  |      | $       | 491,931 |  |   | $       | 496,084 |  
|                                          | Other revenues |                        |         | 2,836   |  |      |         | 2,411   |  |   |         | (1,209  | )
|                                          |                |                        |         |         |  |      |         |         |  |   |         |        
|                                          |                |                        | 804,938 |         |  |      | 494,342 |         |  |   | 494,875 |        
|Cost of goods sold                        |                |                        | 768,391 |         |  |      | 473,682 |         |  |   | 462,655 |        
|Marketing, general and administrative     |                |                        | 31,811  |         |  |      | 29,715  |         |  |   | 31,813  |        
|                                          |                |                        |         |         |  |      |         |         |  |   |         |        
|Operating earnings (losses)               |                |                        | 4,736   |         |  |      | (9,055  | )       |  |   | 407     |        
|Interest                                  |                |                        | 15,307  |         |  |      | 12,845  |         |  |   | 9,514   |        
|Equity income from investments            |                |                        | (29,966 | )       |  |      | (26,056 | )       |  |   | (41,331 | )      
|                                          |                |                        |         |         |  |      |         |         |  |   |         |        
|Income before income taxes                |                | $                      | 19,395  |         |  | $    | 4,156   |         |  | $ | 32,224  |        
|                                          |                |                        |         |         |  |      |         |         |  |   |         |        
|Intersegment sales                        |                | $                      | (1,363  | )       |  | $    | (698    | )       |  | $ | (560    | )      
|                                          |                |                        |         |         |  |      |         |         |  |   |         |        
|Total identifiable assets 
    August 31 |                | $                      | 475,004 |         |  | $    | 498,872 |         |  | $ | 439,942 |        
|                                          |                |                        |         |         |  |      |         |         |  |   |         |        



---



|  |                                                                                                                                                                                                              
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | The 2004 net sales increase from 2003 and
    2002 is primarily due to the additional crushing capacity of the
    Fairmont, Minnesota facility that began operation in the first
    fiscal quarter of 2004.




PRICE RISK AND HEDGING

Whenever the Company enters into a commodity
purchase commitment it incurs risks of carrying inventory,
including risks related to price changes and performance
(including delivery, quality, quantity and shipment period). The
Company is exposed to risk of loss in the market value of
positions held, consisting of inventory and purchase contracts
at a fixed or partially fixed price in the event market prices
decrease. The Company is also exposed to risk of loss on its
fixed price or partially fixed price sales contracts in the
event market prices increase.

To reduce the price change risks associated with
holding fixed price commitments, the Company generally takes
opposite and offsetting positions by entering into commodity
futures contracts (either a straight futures contract or an
options futures contract) on regulated commodity futures
exchanges for grain, and regulated mercantile exchanges for
refined products and crude oil. The crude oil and most of the
grain and oilseed volume handled by the Company can be hedged.
Some grains cannot be hedged because there are no futures for
certain commodities. For those commodities, risk is managed
through the use of forward sales and various pricing
arrangements and to some extent cross-commodity futures hedging.
While hedging activities reduce the risk of loss from changing
market values of inventory, such activities also limit the gain
potential which otherwise could result from changes in market
prices of inventory. The Companys policy is to generally
maintain hedged positions in grain. The Companys
profitability from operations is primarily derived from margins
on products sold and grain merchandised, not from hedging
transactions. Hedging arrangements do not protect against
nonperformance by counterparties to contracts, and therefore,
contract values are reviewed and adjusted to reflect potential
non-performance.

When a futures contract is entered into, an
initial margin deposit must be sent to the applicable exchange
or broker. The amount of the deposit is set by the exchange and
varies by commodity. If the market price of a short futures
contract increases, then an additional maintenance margin
deposit would be required. Similarly, if the price of a long
futures contract decreases, a maintenance margin deposit would

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be required and sent to the applicable exchange.
Subsequent price changes could require additional maintenance
margins or could result in the return of maintenance margins.


At any one time, inventory and purchase contracts
for delivery to the Company may be substantial. The Company has
risk management policies and procedures that include net
position limits. These limits are defined for each commodity and
include both trader and management limits. This policy, and
computerized procedures in grain marketing operations, requires
a review by operations management when any trader is outside of
position limits and also a review by senior management of the
Company if operating areas are outside of position limits. A
similar process is used in energy operations. The position
limits are reviewed at least annually with the management of the
Company. The Company monitors current market conditions and may
expand or reduce its risk management policies or procedures in
response to changes in those conditions. In addition, all
purchase and sales contracts are subject to credit approvals and
appropriate terms and conditions.




EMPLOYEES

At August 31, 2004, CHS had approximately
6,800 full, part-time and seasonal employees, which included
approximately 560 employees of NCRA. Of that total,
approximately 1,900 were employed in the Energy segment, 3,520
in the Country Operations and Services segment (including
approximately 1,130 seasonal and temporary employees), 440 in
the Grain Marketing segment, 710 in the Processed Grains and
Foods segment and 230 in corporate and administrative functions.
In addition to those employed directly by the Company, many
employees work for the joint ventures in which the Company has
an ownership interest, and are not included in these counts. All
of the employees in the Agronomy segment and a portion of the
Grain Marketing and Processed Grains and Foods segments are
employed in this manner.

Employees in certain areas are represented by
collective bargaining agreements. Refinery and pipeline workers
in Laurel, Montana (183 employees), are represented by
agreements with two unions (Paper, Allied-Industrial, Chemical
and Energy Workers International Union (PACE) and Oil Basin
Pipeliners Union (OBP)), for which agreements are in place
through 2006 in regard to wages and benefits. The contracts
covering the NCRA McPherson, Kansas refinery (260 employees
in the PACE union) are also in place through 2006. There are
approximately 165 employees in transportation and lubricant
plant operations that are covered by other collective bargaining
agreements that expire at various times. Production workers in
grain marketing operations (142 employees) are represented
by agreements with four unions, which expire at various times in
2005 and 2006. Finally, certain production workers in oilseed
processing operations are subject to collective bargaining
agreements with the American Federation of Grain Millers
(120 employees) and the Pipefitters Union
(2 employees) for which agreements are in place through
2006.




MEMBERSHIP IN THE COMPANY AND AUTHORIZED
CAPITAL

Introduction

The Company is an agricultural membership
cooperative organized under Minnesota cooperative law to do
business with member and non-member patrons. Patrons, and not
the Company, are subject to income taxes on income from
patronage sources. The Company is subject to income taxes on
non-patronage-sourced income. See  Tax
Treatment below.

Distribution of Net Income; Patronage
Dividends

The Company is required by its organizational
documents annually to distribute net earnings derived from
patronage business with members, after payment of dividends on
equity capital, to members on the basis of patronage, except
that the Board of Directors may elect to retain and add to the
Companys unallocated capital reserve an amount not to
exceed 10% of the distributable net income from patronage

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business. Net income from non-patronage business
may be distributed to members or added to the unallocated
capital reserve, in whatever proportions the Board of Directors
deems appropriate.


These distributions, referred to as
patronage dividends, may be distributed in cash,
patrons equities, revolving fund certificates, securities
of the Company or others, or any combination designated by the
Board of Directors. Since 1998, the Board of Directors has
distributed patronage dividends in the form of 30% cash and 70%
patrons equities (see  Patrons
Equities below). The Board of Directors may change the mix
in the form of the patronage dividend in the future. In making
distributions, the Board of Directors may use any method of
allocation that, in its judgment, is reasonable and equitable.
Patronage dividends distributed during the years ended
August 31, 2004, 2003 and 2002 were $95.2 million
($28.7 million in cash), $88.3 million
($26.5 million in cash) and $132.6 million
($40.1 million in cash), respectively.

Patrons Equities

Patrons equities are in the form of a book
entry and represent a right to receive cash or other property
when redeemed by the Company. Patrons equities form part
of the capital of the Company, do not bear interest and are not
subject to redemption upon request of a member. Patrons
equities are redeemable only at the discretion of the Board of
Directors and in accordance with the terms of the redemption
policy adopted by the Board of Directors, which may be modified
at any time without member consent. A new policy was adopted
effective September 1, 2004, whereby redemptions of capital
equity certificates approved by the Board of Directors will be
divided into two pools, one for non-individuals (primarily
member cooperatives) who may participate in an annual pro-rata
program for equities older than 10 years, and another for
individual members who are eligible for equity redemptions at
age 72 or upon death. The amount that each non-individual
member receives under the pro-rata program in any year will be
determined by multiplying the dollars available for pro-rata
redemptions that year as determined by the Board of Directors,
by a fraction, the numerator of which is the amount of patronage
certificates older than 10 years held by that member, and
the denominator is the sum of the patronage certificates older
than 10 years held by all eligible non-individuals.

Cash redemptions of patrons and other equities
during the years ended August 31, 2004, 2003 and 2002 were
$10.3 million, $31.1 million and $31.1 million,
respectively. An additional $13.0 million of equities were
redeemed by issuance of shares of the Companys 8%
Cumulative Redeemable Preferred Stock during the year ended
August 31, 2004.

Governance

The Company is managed by a Board of Directors of
not less than 17 persons elected by the members at the
Companys annual meeting. Terms of directors are staggered
so that no more than seven directors are elected in any year.
The Board of Directors is currently comprised of
17 directors. The articles of incorporation and bylaws of
the Company may be amended only upon approval of a majority of
the votes cast at an annual or special meeting of the members,
except for the higher vote described under
 Certain Antitakeover Measures below.

Membership

Membership in the Company is restricted to
certain producers of agricultural products and to associations
of producers of agricultural products that are organized and
operating so as to adhere to the provisions of the Agricultural
Marketing Act and the Capper-Volstead Act, as amended. The Board
of Directors may establish other qualifications for membership,
as it may from time to time deem advisable.

As a membership cooperative, the Company does not
have common stock. The Company may issue equity or debt
securities, on a patronage basis or otherwise, to its members.
The Company has two classes of outstanding membership.
Individual members are individuals actually engaged in the
production of agricultural products. Cooperative associations
are associations of agricultural producers and may be either

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cooperatives or other associations organized and
operated under the provisions of the Agricultural Marketing Act
and the Capper-Volstead Act.


Voting Rights

Voting rights arise by virtue of membership in
the Company, not because of ownership of any equity or debt
security. Members that are cooperative associations are entitled
to vote based upon a formula that takes into account the equity
held by the cooperative in the Company and the average amount of
business done with the Company over the previous three years.

Members who are individuals are entitled to one
vote each. Individual members may exercise their voting power
directly or through a patrons association associated with
a grain elevator, feed mill, seed plant or any other Company
facility (with certain historical exceptions) recognized by the
Board of Directors. The number of votes of patrons
associations is determined under the same formula as cooperative
association members.

Most matters submitted to a vote of the members
require the approval of a majority of the votes cast at a
meeting of the members, although certain actions require a
greater vote. See Certain Antitakeover Measures
below.

Debt and Equity Instruments

The Company may issue debt and equity instruments
to its current members and patrons, on a patronage basis or
otherwise, and to persons who are neither members nor patrons.
Capital equity certificates issued by the Company are subject to
a first lien in favor of the Company for all indebtedness of the
holder to the Company. As of August 31, 2004, the
Companys outstanding capital included patrons
equities (consisting of capital equity certificates and
non-patronage earnings certificates), 8% Cumulative Redeemable
Preferred Stock and certain capital reserves.

Distribution of Assets Upon Dissolution;
Merger and Consolidation

In the event of any dissolution, liquidation or
winding up of the Company, whether voluntary or involuntary, all
debts and liabilities would be paid first according to their
respective priorities. After such payment, the holders of the
preferred stock would then be entitled to receive out of
available assets $25.00 per share plus all dividends
accumulated and unpaid on that share, whether or not declared,
to and including the date of distribution. This distribution to
the holders of the preferred stock would be made before any
payment is made or assets distributed to the holders of any
security that ranks junior to the preferred stock but after the
payment of the liquidation preference of any of securities that
rank senior to the preferred stock. After such distribution to
the holders of equity capital, any excess would be paid to
patrons on the basis of their past patronage. The bylaws provide
for the allocation among the members and nonmember patrons of
the consideration received in any merger or consolidation to
which the Company is a party.

Certain Antitakeover Measures

The Companys governing documents may be
amended upon the approval of a majority of the votes cast at an
annual or special meeting. However, if the Board of Directors,
in its sole discretion, declares that a proposed amendment to
the Companys governing documents involves or is related to
a hostile takeover, the amendment must be adopted by
80% of the total voting power of the members of the Company.

The approval of not less than two-thirds of the
votes cast at a meeting is required to approve a change of
control transaction which would include a merger,
consolidation, liquidation, dissolution, or sale of all or
substantially all of the Companys assets. If the Board of
Directors determines that a proposed change of control
transaction involves a hostile takeover, the 80% approval
requirement applies.

22



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The term hostile takeover is not
further defined in the Minnesota cooperative law or the
governing documents of the Company.


Tax Treatment

Subchapter T of the Internal Revenue Code
sets forth rules for the tax treatment of cooperatives and
applies to both cooperatives exempt from taxation under
Section 521 of the Internal Revenue Code and to nonexempt
corporations operating on a cooperative basis. The Company is a
nonexempt cooperative.

As a cooperative, the Company is not taxed on
qualified patronage allocated to its members either in the form
of equities or cash. Consequently, such amounts are taxed only
at the patron level. However, the amounts of any allocated but
undistributed patronage earnings (called non-qualified unit
retains) are taxable to the Company when allocated. Upon
redemption of any such non-qualified unit retains, the amount is
deductible to the Company and taxable to the member.

Income derived by the Company from non-patronage
sources is not entitled to the single tax benefit of
Subchapter T and is taxed to the Company at corporate income tax
rates.

NCRA is not consolidated for tax purposes.





|        |           
|------- | ----------
|Item 2. | Properties

The Company owns or leases energy, grain handling
and processing, food manufacturing and agronomy related
facilities throughout the United States. Below is a summary of
these locations.

Energy

Facilities in the Companys Energy business
segment include the following, all of which are owned except
where indicated as leased:

|                                                     |                           |                                                                                                                                              |                                       
|---------------------------------------------------- | ------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------
|Refinery                                             |                           | Laurel, Montana                                                                                                                             
|Propane terminal                                     |                           | Glenwood, Minnesota                                                                                                                         
|Transportation terminals/ repair facilities          |                           | 12 locations in Iowa, Kansas, Minnesota, Montana,
    North Dakota, South Dakota, Texas, Washington and Wisconsin, 3
    of which are leased
|Petroleum & asphalt terminals/storage
    facilities |                           | 9 locations in Montana, North Dakota and Wisconsin                                                                                          
|Pump stations                                        |                           | 11 locations in Montana and North Dakota                                                                                                    
|Pipelines:                                           |                           |                                                                                                                                             
|                                                     | Cenex Pipeline, LLC       |                                                                                                                                              | Laurel, Montana to Fargo, North Dakota
|                                                     | Front Range Pipeline, LLC |                                                                                                                                              | Canadian border to Laurel, Montana    
|Convenience stores/gas stations                      |                           | 33 locations in Iowa, Minnesota, Montana, North
    Dakota, South Dakota and Wyoming                                                        
|Lubricant plants/warehouses                          |                           | 3 locations in Minnesota, Ohio and Texas                                                                                                    

The Company has a 74.5% interest in NCRA, which
owns and operates the following facilities:

|                            |  |                                                           
|--------------------------- |  | ----------------------------------------------------------
|Refinery                    |  | McPherson, Kansas                                         
|Petroleum terminals/storage |  | 2 locations in Iowa and Kansas                            
|Pipeline                    |  | McPherson, Kansas to Council Bluffs, Iowa                 
|Jayhawk Pipeline, LLC       |  | Throughout Kansas, with branches in Oklahoma and
    Texas
|Jayhawk stations            |  | 40 locations located in Kansas and Oklahoma               

23



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Grain Marketing

The Company owns or leases grain terminals used
in the Grain Marketing business segment at the following
locations:



| |                                      
| | -------------------------------------
| | Collins, Mississippi (owned)         
| | Davenport, Iowa (2 owned)            
| | Friona, Texas (owned)                
| | Kalama, Washington (leased)          
| | Minneapolis, Minnesota (owned, idle) 
| | Myrtle Grove, Louisiana (owned)      
| | St. Paul, Minnesota (leased)         
| | Savage, Minnesota (owned)            
| | Spokane, Washington (owned)          
| | Superior, Wisconsin (owned)          
| | Winona, Minnesota (1 owned, 1 leased)

Country Operations and Services

In the Country Operations and Services business
segment, the Company owns 289 agri-operations locations (of
which some of the facilities are on leased land), 8 feed
manufacturing facilities and 2 sunflower plants located in
Minnesota, Nebraska, North Dakota, South Dakota, Montana,
Washington, Oregon and Idaho.

Processed Grains and Foods

Within the Processed Grains and Foods business
segment, the Company owns and leases the following facilities:



| |                   
| | ------------------
| | Oilseed Processing

The Company owns a campus in Mankato, Minnesota,
comprised of a soybean crushing plant, an oilseed refinery, a
soyflour plant, a quality control laboratory and an
administration office. A soybean crushing plant in Fairmont,
Minnesota became operational during the fiscal quarter ended
November 30, 2003.



| |              
| | -------------
| | Wheat Milling

The Company owns five flour milling facilities at
the following locations, all of which are leased to Horizon
Milling, LLC:



| |                           
| | --------------------------
| | Rush City, Minnesota      
| | Kenosha, Wisconsin        
| | Houston, Texas            
| | Mount Pocono, Pennsylvania
| | Fairmount, North Dakota   



| |      
| | -----
| | Foods

The Company leases manufacturing facilities in
New Brighton, Minnesota, Ft. Worth, Texas and Phoenix,
Arizona. In addition, the Company owns two manufacturing
facilities in Ft. Worth, Texas. The Company completed
construction of a facility near Newton, North Carolina in 2003,
which was originally to be used for manufacturing, but at this
time the Company intends to sell or lease it. All facilities are
related to the Companys Mexican foods operations.

24



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Corporate Headquarters

The Company is headquartered in Inver Grove
Heights, Minnesota. The Company owns a 33-acre campus consisting
of one main building with approximately 320,000 square feet
of office space and two smaller buildings with approximately
13,400 and 9,000 square feet of space.

The Companys internet address is
www.chsinc.com.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

The Company is involved as a defendant in various
lawsuits, claims and disputes, which are in the normal course of
the Companys business. The resolution of any such matters
may affect consolidated net income for any fiscal period;
however, management believes any resulting liabilities,
individually or in the aggregate, will not have a material
effect on the consolidated financial position, results of
operations or cash flows of the Company during any fiscal year.

In October 2003, the Company and NCRA reached
agreement with the Environmental Protection Agency
(EPA) and the State of Montanas Department of
Environmental Quality and the State of Kansas Department of
Health and Environment, regarding the terms of settlements with
respect to reducing air emissions at the Companys Laurel,
Montana and NCRAs McPherson, Kansas refineries. These
settlements are part of a series of similar settlements that the
EPA has negotiated with major refiners under the EPAs
Petroleum Refinery Initiative. The settlements, which resulted
from nearly three years of discussions, take the form of consent
decrees filed with the U.S. District Court for the District
of Montana (Billings Division) and the U.S. District Court
for the District of Kansas. Each consent decree details specific
capital improvements, supplemental environmental projects and
operational changes that the Company and NCRA have agreed to
implement at the relevant refinery over the next several years.
The consent decrees also require the Company and NCRA to pay
approximately $0.5 million in aggregate civil cash
penalties. The Company and NCRA anticipate that their aggregate
capital expenditures related to these settlements will range
from approximately $25.0 million to $30.0 million over
the next seven years. Approximately 50 percent of the
expenditures will be made over the first three years. The
Company does not believe that the settlements will have a
material adverse affect on the Company.






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

None.




PART II.






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

The Company has approximately 48,100 members, of
which approximately 1,100 are cooperative association members
and approximately 47,000 are individual members. As a
cooperative, the Company does not have any common equity that is
traded.

On August 31, 2004 the Company had
4,226,428 shares of 8% Cumulative Redeemable Preferred
Stock outstanding, which is listed on the NASDAQ National Market
under the symbol CHSCP.

On April 25, 2003, the Company issued
298,099 shares of its 8% Cumulative Redeemable Preferred
Stock (the New Shares) on conversion of 7,452,439
then-outstanding shares of 8% Preferred Stock (the Old
Shares). The New Shares were exchanged by the Company with
its existing security holders (the holders of the Old Shares)
exclusively and no commission or other remuneration was paid or
given directly or indirectly for soliciting the exchange.
Accordingly, the Company relied on the exemption from
registration contained in Section 3(a)(9) of the Securities
Act of 1933, as amended, for the issuance of the New Shares and
did not file a registration statement with the Securities and
Exchanges Commission with respect to that issuance.

25



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Other than the issuance of the New Shares, the
Company has not sold any equity securities during the three
years ended August 31, 2004 that were not registered under
the Securities Act of 1933, as amended.






|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

The selected financial information below has been
derived from the Companys consolidated financial
statements for the years ended August 31. The selected
consolidated financial information for August 31, 2004,
2003, and 2002 should be read in conjunction with the
Companys consolidated financial statements and notes
thereto included elsewhere in this filing.

Summary Consolidated Financial Data

|                                      |                                              |                        |            |            |  |      |           |           |  |      |           |           |  |   |           |           |  |   |           |           | 
|------------------------------------- | -------------------------------------------- | ---------------------- | ---------- | ---------- |  | ---- | --------- | --------- |  | ---- | --------- | --------- |  | - | --------- | --------- |  | - | --------- | --------- | 
|                                      |                                              | 2004                   |            | 2003       |  | 2002 |           | 2001      |  | 2000
|                                      |                                              |                        |            |            |  |      |           |           |  |     
|                                      |                                              |                       
|                                      |                                              | (dollars in thousands)
|Income Statement Data:                |                                              |                        |            |            |  |      |           |           |  |      |           |           |  |   |           |           |  |   |           |          
|Revenues:                             |                                              |                        |            |            |  |      |           |           |  |      |           |           |  |   |           |           |  |   |           |          
|                                      | Net sales                                    |                        | $          | 10,909,333 |  |      | $         | 9,270,734 |  |      | $         | 7,156,454 |  |   | $         | 7,464,242 |  |   | $         | 8,248,413 | 
|                                      | Other revenues                               |                        |            | 141,303    |  |      |           | 122,578   |  |      |           | 107,351   |  |   |           | 117,378   |  |   |           | 102,965   | 
|                                      |                                              |                        |            |            |  |      |           |           |  |      |           |           |  |   |           |           |  |   |           |          
|                                      |                                              |                        | 11,050,636 |            |  |      | 9,393,312 |           |  |      | 7,263,805 |           |  |   | 7,581,620 |           |  |   | 8,351,378 |          
|Cost of goods sold                    |                                              |                        | 10,604,245 |            |  |      | 9,060,555 |           |  |      | 6,940,050 |           |  |   | 7,177,135 |           |  |   | 8,051,057 |          
|Marketing, general and administrative |                                              |                        | 208,284    |            |  |      | 183,757   |           |  |      | 182,175   |           |  |   | 183,491   |           |  |   | 155,266   |          
|                                      |                                              |                        |            |            |  |      |           |           |  |      |           |           |  |   |           |           |  |   |           |          
|Operating earnings                    |                                              |                        | 238,107    |            |  |      | 149,000   |           |  |      | 141,580   |           |  |   | 220,994   |           |  |   | 145,055   |          
|Gain on sale of investment            |                                              |                        | (14,666    | )          |  |      |           |           |  |      |           |           |  |   |           |           |  |   |           |          
|Gain on legal settlements             |                                              |                        | (692       | )          |  |      | (10,867   | )         |  |      | (2,970    | )         |  |   |           |           |  |   |           |          
|Interest                              |                                              |                        | 51,625     |            |  |      | 48,675    |           |  |      | 42,455    |           |  |   | 61,436    |           |  |   | 57,566    |          
|Equity income from investments        |                                              |                        | (79,022    | )          |  |      | (47,299   | )         |  |      | (58,133   | )         |  |   | (28,494   | )         |  |   | (28,325   | )        
|Minority interests                    |                                              |                        | 33,830     |            |  |      | 21,950    |           |  |      | 15,390    |           |  |   | 35,098    |           |  |   | 24,546    |          
|                                      |                                              |                        |            |            |  |      |           |           |  |      |           |           |  |   |           |           |  |   |           |          
|Income before income taxes            |                                              |                        | 247,032    |            |  |      | 136,541   |           |  |      | 144,838   |           |  |   | 152,954   |           |  |   | 91,268    |          
|Income taxes                          |                                              |                        | 25,700     |            |  |      | 12,700    |           |  |      | 18,700    |           |  |   | (25,600   | )         |  |   | 3,880     |          
|                                      |                                              |                        |            |            |  |      |           |           |  |      |           |           |  |   |           |           |  |   |           |          
|Net income                            |                                              | $                      | 221,332    |            |  | $    | 123,841   |           |  | $    | 126,138   |           |  | $ | 178,554   |           |  | $ | 87,388    |          
|                                      |                                              |                        |            |            |  |      |           |           |  |      |           |           |  |   |           |           |  |   |           |          
|Balance Sheet Data (August 31):       |                                              |                        |            |            |  |      |           |           |  |      |           |           |  |   |           |           |  |   |           |          
|                                      | Working capital                              |                        | $          | 493,440    |  |      | $         | 458,738   |  |      | $         | 249,115   |  |   | $         | 305,280   |  |   | $         | 214,223   | 
|                                      | Net property, plant and equipment            |                        |            | 1,249,655  |  |      |           | 1,122,982 |  |      |           | 1,057,421 |  |   |           | 1,023,872 |  |   |           | 1,034,768 | 
|                                      | Total assets                                 |                        |            | 4,031,292  |  |      |           | 3,807,968 |  |      |           | 3,481,727 |  |   |           | 3,057,319 |  |   |           | 3,172,680 | 
|                                      | Long-term debt, including current maturities |                        |            | 683,818    |  |      |           | 663,173   |  |      |           | 572,124   |  |   |           | 559,997   |  |   |           | 510,500   | 
|                                      | Total equities                               |                        |            | 1,628,086  |  |      |           | 1,481,711 |  |      |           | 1,289,638 |  |   |           | 1,261,153 |  |   |           | 1,164,426 | 

26



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The selected financial statement information
below has been derived from the Companys five business
segments, and Corporate and Other, for the fiscal years ended
August 31, 2004, 2003 and 2002. The intercompany sales
between segments were $1,154.8 million, $894.3 million
and $753.3 million for the fiscal years ended
August 31, 2004, 2003 and 2002, respectively.

Summary Financial Data By Business
Segment

|                                          |                |                        |         |        |   |      |         |      |   |      |         |      |   |   |           |           |  |   |           |           |  |   |           |           | 
|----------------------------------------- | -------------- | ---------------------- | ------- | ------ | - | ---- | ------- | ---- | - | ---- | ------- | ---- | - | - | --------- | --------- |  | - | --------- | --------- |  | - | --------- | --------- | 
|                                          |                |                        |         |       
|                                          |                | Agronomy               |         | Energy
|                                          |                |                        |         |       
|                                          |                | 2004                   |         | 2003   |   | 2002 |         | 2004 |   | 2003 |         | 2002
|                                          |                |                        |         |        |   |      |         |      |   |      |         |     
|                                          |                |                       
|                                          |                | (dollars in thousands)
|Revenues:                                 |                |                        |         |        |   |      |         |      |   |      |         |      |   |   |           |           |  |   |           |           |  |   |           |          
|                                          | Net sales      |                        |         |        |   |      |         |      |   |      |         |      |   |   | $         | 4,028,248 |  |   | $         | 3,648,093 |  |   | $         | 2,657,689 | 
|                                          | Other revenues |                        | $       | (15    | ) |      | $       | (84  | ) |      | $       | (89  | ) |   |           | 9,193     |  |   |           | 5,655     |  |   |           | 857       | 
|                                          |                |                        |         |        |   |      |         |      |   |      |         |      |   |   |           |           |  |   |           |           |  |   |           |          
|                                          |                |                        | (15     | )      |   |      | (84     | )    |   |      | (89     | )    |   |   | 4,037,441 |           |  |   | 3,653,748 |           |  |   | 2,658,546 |          
|Cost of goods sold                        |                |                        |         |        |   |      |         |      |   |      |         |      |   |   | 3,784,260 |           |  |   | 3,470,726 |           |  |   | 2,483,359 |          
|Marketing, general and administrative     |                |                        | 8,482   |        |   |      | 8,138   |      |   |      | 8,957   |      |   |   | 66,493    |           |  |   | 63,740    |           |  |   | 66,731    |          
|                                          |                |                        |         |        |   |      |         |      |   |      |         |      |   |   |           |           |  |   |           |           |  |   |           |          
|Operating (losses) earnings               |                |                        | (8,497  | )      |   |      | (8,222  | )    |   |      | (9,046  | )    |   |   | 186,688   |           |  |   | 119,282   |           |  |   | 108,456   |          
|Gain on sale of investment                |                |                        |         |        |   |      |         |      |   |      |         |      |   |   | (14,666   | )         |  |   |           |           |  |   |           |          
|Interest                                  |                |                        | (352    | )      |   |      | (974    | )    |   |      | (1,403  | )    |   |   | 13,819    |           |  |   | 16,401    |           |  |   | 16,875    |          
|Equity (income) loss from investments     |                |                        | (35,725 | )      |   |      | (20,773 | )    |   |      | (13,425 | )    |   |   | (1,399    | )         |  |   | (1,353    | )         |  |   | 1,166     |          
|Minority interests                        |                |                        |         |        |   |      |         |      |   |      |         |      |   |   | 32,507    |           |  |   | 20,782    |           |  |   | 14,604    |          
|                                          |                |                        |         |        |   |      |         |      |   |      |         |      |   |   |           |           |  |   |           |           |  |   |           |          
|Income before income taxes                |                | $                      | 27,580  |        |   | $    | 13,525  |      |   | $    | 5,782   |      |   | $ | 156,427   |           |  | $ | 83,452    |           |  | $ | 75,811    |          
|                                          |                |                        |         |        |   |      |         |      |   |      |         |      |   |   |           |           |  |   |           |           |  |   |           |          
|Intersegment sales                        |                |                        |         |        |   |      |         |      |   |      |         |      |   | $ | (121,199  | )         |  | $ | (94,209   | )         |  | $ | (67,367   | )        
|                                          |                |                        |         |        |   |      |         |      |   |      |         |      |   |   |           |           |  |   |           |           |  |   |           |          
|Total identifiable assets 
    August 31 |                | $                      | 327,448 |        |   | $    | 285,906 |      |   | $    | 242,015 |      |   | $ | 1,591,254 |           |  | $ | 1,449,652 |           |  | $ | 1,305,828 |          
|                                          |                |                        |         |        |   |      |         |      |   |      |         |      |   |   |           |           |  |   |           |           |  |   |           |          

|                                          |                |                                 |           |                 |  |      |           |           |  |      |           |           |  |   |           |           |  |   |           |           |  |   |           |           | 
|----------------------------------------- | -------------- | ------------------------------- | --------- | --------------- |  | ---- | --------- | --------- |  | ---- | --------- | --------- |  | - | --------- | --------- |  | - | --------- | --------- |  | - | --------- | --------- | 
|                                          |                |                                 |           |                
|                                          |                | Country Operations and Services |           | Grain Marketing
|                                          |                |                                 |           |                
|                                          |                | 2004                            |           | 2003            |  | 2002 |           | 2004      |  | 2003 |           | 2002     
|                                          |                |                                 |           |                 |  |      |           |           |  |      |           |          
|                                          |                |                                
|                                          |                | (dollars in thousands)         
|Revenues:                                 |                |                                 |           |                 |  |      |           |           |  |      |           |           |  |   |           |           |  |   |           |           |  |   |           |          
|                                          | Net sales      |                                 | $         | 2,227,764       |  |      | $         | 1,885,825 |  |      | $         | 1,474,553 |  |   | $         | 5,006,029 |  |   | $         | 4,139,226 |  |   | $         | 3,281,469 | 
|                                          | Other revenues |                                 |           | 94,381          |  |      |           | 84,206    |  |      |           | 83,361    |  |   |           | 28,710    |  |   |           | 25,676    |  |   |           | 22,399    | 
|                                          |                |                                 |           |                 |  |      |           |           |  |      |           |           |  |   |           |           |  |   |           |           |  |   |           |          
|                                          |                |                                 | 2,322,145 |                 |  |      | 1,970,031 |           |  |      | 1,557,914 |           |  |   | 5,034,739 |           |  |   | 4,164,902 |           |  |   | 3,303,868 |          
|Cost of goods sold                        |                |                                 | 2,199,700 |                 |  |      | 1,876,811 |           |  |      | 1,474,392 |           |  |   | 5,006,704 |           |  |   | 4,133,677 |           |  |   | 3,272,985 |          
|Marketing, general and administrative     |                |                                 | 70,196    |                 |  |      | 55,887    |           |  |      | 47,995    |           |  |   | 25,071    |           |  |   | 21,072    |           |  |   | 22,213    |          
|                                          |                |                                 |           |                 |  |      |           |           |  |      |           |           |  |   |           |           |  |   |           |           |  |   |           |          
|Operating earnings                        |                |                                 | 52,249    |                 |  |      | 37,333    |           |  |      | 35,527    |           |  |   | 2,964     |           |  |   | 10,153    |           |  |   | 8,670     |          
|Gain on legal settlements                 |                |                                 | (692      | )               |  |      | (10,867   | )         |  |      | (2,970    | )         |  |   |           |           |  |   |           |           |  |   |           |          
|Interest                                  |                |                                 | 16,019    |                 |  |      | 14,975    |           |  |      | 13,851    |           |  |   | 5,874     |           |  |   | 4,738     |           |  |   | 4,807     |          
|Equity income (loss) from investments     |                |                                 | (519      | )               |  |      | (788      | )         |  |      | (283      | )         |  |   | (11,413   | )         |  |   | 1,673     |           |  |   | (4,257    | )        
|Minority interests                        |                |                                 | 1,323     |                 |  |      | 1,168     |           |  |      | 786       |           |  |   |           |           |  |   |           |           |  |   |           |          
|                                          |                |                                 |           |                 |  |      |           |           |  |      |           |           |  |   |           |           |  |   |           |           |  |   |           |          
|Income before income taxes                |                | $                               | 36,118    |                 |  | $    | 32,845    |           |  | $    | 24,143    |           |  | $ | 8,503     |           |  | $ | 3,742     |           |  | $ | 8,120     |          
|                                          |                |                                 |           |                 |  |      |           |           |  |      |           |           |  |   |           |           |  |   |           |           |  |   |           |          
|Intersegment sales                        |                | $                               | (987,145  | )               |  | $    | (796,999  | )         |  | $    | (615,853  | )         |  | $ | (45,103   | )         |  | $ | (2,435    | )         |  | $ | (69,561   | )        
|                                          |                |                                 |           |                 |  |      |           |           |  |      |           |           |  |   |           |           |  |   |           |           |  |   |           |          
|Total identifiable assets 
    August 31 |                | $                               | 862,645   |                 |  | $    | 857,523   |           |  | $    | 799,711   |           |  | $ | 487,807   |           |  | $ | 450,415   |           |  | $ | 481,232   |          
|                                          |                |                                 |           |                 |  |      |           |           |  |      |           |           |  |   |           |           |  |   |           |           |  |   |           |          

|                                          |                |                            |         |                     |  |      |         |         |  |      |         |         |   |   |         |       |  |   |         |       |  |   |         |       | 
|----------------------------------------- | -------------- | -------------------------- | ------- | ------------------- |  | ---- | ------- | ------- |  | ---- | ------- | ------- | - | - | ------- | ----- |  | - | ------- | ----- |  | - | ------- | ----- | 
|                                          |                |                            |         |                    
|                                          |                | Processed Grains and Foods |         | Corporate and Other
|                                          |                |                            |         |                    
|                                          |                | 2004                       |         | 2003                |  | 2002 |         | 2004    |  | 2003 |         | 2002   
|                                          |                |                            |         |                     |  |      |         |         |  |      |         |        
|                                          |                |                           
|                                          |                | (dollars in thousands)    
|Revenues:                                 |                |                            |         |                     |  |      |         |         |  |      |         |         |   |   |         |       |  |   |         |       |  |   |         |      
|                                          | Net sales      |                            | $       | 802,102             |  |      | $       | 491,931 |  |      | $       | 496,084 |   |   |         |       |  |   |         |       |  |   |         |       | 
|                                          | Other revenues |                            |         | 2,836               |  |      |         | 2,411   |  |      |         | (1,209  | ) |   | $       | 6,198 |  |   | $       | 4,714 |  |   | $       | 2,032 | 
|                                          |                |                            |         |                     |  |      |         |         |  |      |         |         |   |   |         |       |  |   |         |       |  |   |         |      
|                                          |                |                            | 804,938 |                     |  |      | 494,342 |         |  |      | 494,875 |         |   |   | 6,198   |       |  |   | 4,714   |       |  |   | 2,032   |      
|Cost of goods sold                        |                |                            | 760,918 |                     |  |      | 473,682 |         |  |      | 462,655 |         |   |   |         |       |  |   |         |       |  |   |         |      
|Marketing, general and administrative     |                |                            | 39,284  |                     |  |      | 29,715  |         |  |      | 31,813  |         |   |   | 6,231   |       |  |   | 5,205   |       |  |   | 4,466   |      
|                                          |                |                            |         |                     |  |      |         |         |  |      |         |         |   |   |         |       |  |   |         |       |  |   |         |      
|Operating earnings (losses)               |                |                            | 4,736   |                     |  |      | (9,055  | )       |  |      | 407     |         |   |   | (33     | )     |  |   | (491    | )     |  |   | (2,434  | )    
|Interest                                  |                |                            | 15,307  |                     |  |      | 12,845  |         |  |      | 9,514   |         |   |   | 958     |       |  |   | 690     |       |  |   | (1,189  | )    
|Equity income from investments            |                |                            | (29,966 | )                   |  |      | (26,056 | )       |  |      | (41,331 | )       |   |   |         |       |  |   | (2      | )     |  |   | (3      | )    
|                                          |                |                            |         |                     |  |      |         |         |  |      |         |         |   |   |         |       |  |   |         |       |  |   |         |      
|Income (loss) before income taxes         |                | $                          | 19,395  |                     |  | $    | 4,156   |         |  | $    | 32,224  |         |   | $ | (991    | )     |  | $ | (1,179  | )     |  | $ | (1,242  | )    
|                                          |                |                            |         |                     |  |      |         |         |  |      |         |         |   |   |         |       |  |   |         |       |  |   |         |      
|Intersegment sales                        |                | $                          | (1,363  | )                   |  | $    | (698    | )       |  | $    | (560    | )       |   |   |         |       |  |   |         |       |  |   |         |      
|                                          |                |                            |         |                     |  |      |         |         |  |      |         |         |   |   |         |       |  |   |         |       |  |   |         |      
|Total identifiable assets 
    August 31 |                | $                          | 475,004 |                     |  | $    | 498,872 |         |  | $    | 439,942 |         |   | $ | 287,134 |       |  | $ | 265,600 |       |  | $ | 212,999 |      
|                                          |                |                            |         |                     |  |      |         |         |  |      |         |         |   |   |         |       |  |   |         |       |  |   |         |      

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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

Overview

The following discussions of financial condition
and results of operations should be read in conjunction with the
accompanying audited financial statements and notes to such
statements and the cautionary statement regarding
forward-looking statements found at the beginning of
Part I, Item 1, of this Form 10-K. This
discussion contains forward-looking statements based on current
expectations, assumptions, estimates and projections of
management. Actual results could differ materially from those
anticipated in these forward-looking statements as a result of
certain factors, as more fully described in the cautionary
statement and elsewhere in this Form 10-K.

CHS Inc. (CHS or the Company) is a diversified
company, which provides grain, foods and energy resources to
businesses and consumers. As a cooperative, the Company is owned
by farmers, ranchers and their local cooperatives from the Great
Lakes to the Pacific Northwest and from the Canadian border to
Texas. The Company also has preferred stockholders that own
shares of the Companys 8% Cumulative Redeemable Preferred
Stock.

CHS buys commodities from and provides products
and services to members and other customers on a global basis.
The Company provides products and services ranging from grain
marketing to food processing and operates petroleum refineries
and pipelines. Through a broad range of working partnerships,
CHS markets and distributes Cenex® brand energy products,
along with agronomic inputs and feed to rural America.

The Company has five distinct business segments:
Agronomy, Energy, Country Operations and Services, Grain
Marketing and Processed Grains and Foods. Together these
business segments create vertical integration to link producers
with consumers. The first two segments, Agronomy and Energy,
produce and provide for the wholesale distribution of crop
production inputs. The third segment, Country Operations and
Services, serves as the Company-owned retailer of a portion of
these crop inputs and also serves as the first handler of a
significant portion of the crops marketed and processed by the
Company. The fourth segment, Grain Marketing, purchases and
resells grains and oilseeds originated by the Country Operations
and Services segment, by member cooperatives and also by third
parties. The fifth business segment, Processed Grains and Foods,
converts grains and oilseeds into value-added products.

Summary data for each of these segments for the
fiscal years ended August 31, 2004, 2003 and 2002 is shown
on prior pages. Except as otherwise specified, references to
years indicate the CHS fiscal year ended August 31, 2004 or
ended August 31 of the year referenced.

Corporate administrative expenses are allocated
to all five business segments based on either direct usage for
services that can be tracked, such as information technology and
legal, and other factors or considerations relevant to the costs
incurred. A portion of these costs are allocated based on direct
usage. Administrative expenses are allocated to all segments,
including segments comprised solely of investments and joint
ventures.

Many of the Companys business activities
are highly seasonal and operating results will vary throughout
the year. Overall, the Companys income is generally lowest
during the second fiscal quarter and highest during the third
fiscal quarter. Certain business segments are subject to varying
seasonal fluctuations. For example, the Agronomy and Country
Operations and Services segments experience higher volumes and
income during the spring planting season and in the fall, which
corresponds to harvest. The Grain Marketing segment is subject
to fluctuations in volume and earnings based on producer
harvests, world grain prices and demand. The Companys
Energy segment generally experiences higher volumes and
profitability in certain operating areas, such as refined
products, in the summer and early fall when gasoline and diesel
fuel usage is highest. Other energy products, such as propane,
experience higher volumes and profitability during the winter
heating and crop drying seasons.

The Companys revenue can be significantly
affected by global market prices for commodities such as
petroleum products, natural gas, grains, oilseeds and flour.
Changes in market prices for commodities that

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the Company purchases without a corresponding
change in the selling prices of those products can affect
revenues and operating earnings. Commodity prices are affected
by a wide range of factors beyond the Companys control,
including the weather, crop damage due to disease or insects,
drought, the availability and adequacy of supply, government
regulations and policies, world events, and general political
and economic conditions.


While the Companys sales and operating
results are derived from businesses and operations which are
wholly-owned and majority-owned, a portion of business
operations are conducted through companies in which the Company
holds ownership interests of 50% or less and does not control
the operations. The Company accounts for these investments
primarily using the equity method of accounting, wherein CHS
records its proportionate share of income or loss reported by
the entity as equity income from investments, without
consolidating the revenues and expenses of the entity in the
Companys consolidated statements of operations. These
investments principally include the Companys 50% ownership
in each of the following companies; Agriliance, LLC
(Agriliance), TEMCO, LLC (TEMCO), United Harvest, LLC (United
Harvest), Ventura Foods, LLC (Ventura Foods), and the 24%
ownership in Horizon Milling, LLC (Horizon).

Agriliance is owned and governed by Land
OLakes, Inc. (50%) and United Country Brands, LLC (50%).
United Country Brands, LLC, was initially owned and governed 50%
by the Company and 50% by Farmland Industries, Inc. (Farmland),
and was formed solely to hold a 50% interest in Agriliance.
Initially, the Companys indirect share of earnings
(economic interest) in Agriliance was 25%, which was the same as
the Companys ownership or governance interest. In April
2003, the Company acquired an additional 13.1% economic interest
in the wholesale crop protection business of Agriliance (the
CPP Business), which constituted only a part of the
Agriliance business operations, for a cash payment of
$34.3 million. After the transaction, the economic
interests in Agriliance were owned 50% by Land OLakes, 25%
plus an additional 13.1% of the CPP Business by the Company and
25% less 13.1% of the CPP Business by Farmland. The ownership or
governance interests in Agriliance did not change with the
purchase of this additional economic interest. Agriliances
earnings were split among the members based upon the respective
economic interests of each member. On April 30, 2004, the
Company purchased all of Farmlands remaining interest in
Agriliance for $27.5 million in cash. The Company now owns
50% of the economic and governance interests in Agriliance, and
continues to account for this investment using the equity method
of accounting.

The consolidated financial statements include the
accounts of CHS and all of its wholly-owned and majority-owned
subsidiaries, including the National Cooperative Refinery
Association (NCRA). All significant intercompany accounts and
transactions have been eliminated.

Results of Operations



| |                                                           
| | ----------------------------------------------------------
| | Comparison of the Years Ended
    August 31, 2004 and 2003

General.The Company
recorded pretax earnings of $247.0 million in fiscal 2004
compared to $136.5 million in fiscal 2003, an increase of
$110.5 million (81%). These results reflected increased
pretax earnings in each of the business segments of the Company.

The Agronomy segment generated pretax earnings of
$27.6 million for the year ended August 31, 2004
compared to $13.5 million in the prior year. This increase
in earnings of $14.1 million (104%) is primarily
attributable to the acquisition of Farmlands interests in
Agriliance, as previously discussed, which represents
$7.3 million of the increase in earnings, and improved
Agriliance earnings from operations.

The Energy segment generated pretax earnings of
$156.4 million for the year ended August 31, 2004
compared with $83.5 million in the prior year. This
increase in earnings of $72.9 million (87%) is primarily
attributable to higher margins on refined fuels products, which
resulted mainly from increased global demand. Earnings on
lubricants, propane and transportation also improved compared to
the previous year.

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The Country Operations and Services segment
generated pretax earnings of $36.1 million for the year
ended August 31, 2004 compared to $32.8 million in the
prior year. This increase in earnings of $3.3 million (10%)
resulted primarily from strong operating margins in energy,
seed, agronomy and processed sunflower products. In addition,
pretax earnings from commodity brokerage and insurance services
improved by $0.9 million compared to the prior year. During
2004 and 2003, the Country Operations and Services segment
recorded $0.7 million and $10.9 million of earnings,
respectively, from the cash settlements of a class action
lawsuit alleging illegal price fixing against various feed
vitamin product suppliers.

The Grain Marketing segment generated pretax
earnings of $8.5 million for the year ended August 31,
2004 compared to $3.7 million in the prior year. This
increase in earnings of $4.8 million (127%) includes
improved earnings in the Companys two exporting joint
ventures, TEMCO and United Harvest. Short supplies created
strong demands for wheat, corn and soybeans along with favorable
ocean freight spreads from the Pacific Northwest to Asia
contributed to the improved earnings for these two joint
ventures. During the third quarter of fiscal 2004, the Company,
along with several other international grain marketing
companies, experienced contract issues with Chinese customers
for soybeans. Because the value of soybeans had declined between
the date of the contracts and the delivery date, certain Chinese
customers indicated their intent of nonperformance on these
contracts. At that time, based upon an assessment of the impact
of default, the Company valued those contracts at
$18.5 million less than current market value, which was
recorded as an addition to cost of goods sold in May 2004. The
Company has since reached resolution on most of those contracts
and has established receivables for the expected proceeds. These
expected proceeds approximate the valuation placed on the
contracts on May 31, 2004, and therefore, there was no
additional impact on the Companys net income during the
fourth quarter of fiscal 2004.

The Processed Grains and Foods segment generated
pretax earnings of $19.4 million for the year ended
August 31, 2004 compared to $4.2 million in the prior
year. This increase in earnings of $15.2 million was
primarily the result of improved crushing and refining margins
within the Companys oilseed processing operations. A poor
2003 harvest of soybeans in the U.S. because of weather
conditions coupled with strong export demand put soybeans in
short supply which widened soybean meal and oil margins
throughout most of fiscal 2004. Earnings from our wheat milling
joint venture, Horizon Milling, improved $3.0 million in
fiscal 2004 while results from Mexican foods declined
$1.1 million. Our share of earnings from Ventura Foods, our
packaged foods joint venture, increased $0.9 million
compared to the prior year.

Net Income.Consolidated net income for the year ended August 31, 2004
was $221.3 million compared to $123.8 million for the
year ended August 31, 2003, which represents a
$97.5 million (79%) increase.

Net Sales.Consolidated net sales of $10.9 billion for the year ended
August 31, 2004 compared to $9.3 billion for the year
ended August 31, 2003, which represents a $1.6 billion
(18%) increase.

Energy net sales of $3.9 billion increased
$353.2 million (10%) during the year ended August 31,
2004 compared to the year ended August 31, 2003. During the
years ended August 31, 2004 and 2003, the Energy segment
recorded sales to the Country Operations and Services segment of
$121.2 million and $94.2 million, respectively.
Intersegment sales are eliminated in deriving consolidated sales
but are included for segment reporting purposes. The net sales
increase of $353.2 million is comprised of an increase of
$578.9 million related to price appreciation and a decrease
in sales of $225.7 million because of lower sales volume,
primary on refined fuels and propane products. On a more
product-specific basis, the Company owns and operates two crude
oil refineries from which it produces approximately 60% of the
refined fuels products that it sells, the balance is purchased
from other U.S. refiners and distributors. Refined fuels
net sales increased $317.9 million (13%), of which
$444.4 million was related to a net average price increase
partially offset by a decrease of $126.5 million related to
reduced volumes. The sales price of refined fuels increased
$0.17 per gallon (18%) and volumes decreased 4% when
comparing the year ended August 31, 2004 with the same
period a year ago. Higher crude oil costs and global supply and

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demand forces contributed to the increase in
refined fuels selling prices. The volume of refined fuels sales
decreased primarily because of the non-renewal of a supply
agreement with another refiner. Propane net sales increased by
$33.1 million (7%), of which $84.6 million was related
to a net average selling price change partially offset by a
decrease of $51.5 million due to reduced volumes compared
to the previous year. Propane prices increased $0.10 per
gallon (18%) and sales volume decreased 9% in comparison of the
same periods the prior year. Higher propane prices reflect lower
industry stocks during the later part of 2003 as the result of a
cold winter earlier in the calendar year. The lower sales volume
for propane during the year ended August 31, 2004 is
primarily reflective of a dry autumn which offered minimal
opportunity for sales related to crop drying and a relatively
warm early winter which reduced demand for home heating as
compared to the same period in 2003.


Company-wide grain and oilseed net sales of
$5.3 billion increased $867.1 million (19%) during the
year ended August 31, 2004 compared to the year ended
August 31, 2003. Sales to external customers by the Grain
Marketing segment totaled $4,960.9 million and
$4,136.8 million during the years ended August 31,
2004 and 2003, respectively. Grain sales of the Country
Operations and Services segment to external customers during
these same periods were $386.0 million and
$343.0 million, respectively. Sales of grain between
Country Operations and Services and Grain Marketing segments
during these same periods were $1,032.2 million and
$799.4 million, respectively. These intersegment sales are
included for segment reporting purposes, but are eliminated on a
consolidated basis. The net sales increase of
$867.1 million is attributable to higher grain prices and
increased volumes. during the year ended August 31, 2004
compared to the same period last fiscal year. The average sales
price of all grain and oilseed commodities sold reflected an
increase of $0.44 per bushel (11%), which contributed
$480.8 million to the increase in net sales. Commodity
prices in general increased due to a poor 2003 harvest in the
U.S. because of weather conditions which caused a shortage of
grains and oilseeds. The average market price per bushel of
soybeans, corn and spring wheat were $2.34, $0.37 and $0.25
greater than the prices on those same grains as compared to the
year ended August 31, 2003. Volumes increased 8% during the
year ended August 31, 2004 compared with the same period of
a year ago, and contributed $386.3 million to the increase.
Wheat, corn and soybeans reflected the largest volume increases.
Demand from Chinese customers increased international exports of
soybeans.

Country operations non-grain net sales of
$854.6 million increased by $108.9 million (15%)
during the year ended August 31, 2004 compared to the year
ended August 31, 2003 primarily the result of increased
average selling prices on energy, crop nutrients, seed and
processed sunflower products. Overall, the average selling price
on these products has increased compared to the previous year.
In addition, volumes are up due to acquisitions.

Processed Grains and Foods segment net sales of
$800.7 million increased $309.5 million (63%) during
the year ended August 31, 2004 compared to the year ended
August 31, 2003. Oilseed processing sales increased
$313.4 million, of which $159.6 million was due to
higher sales volumes, and $153.8 million was due to price
appreciation. The average selling price of processed and refined
oilseed products increased $76 per ton and $0.08 per
pound, respectively, compared to the previous year. The volume
increase is primarily due to the additional volumes from the
crushing plant in Fairmont, Minnesota that began operations
during the first quarter of fiscal year 2004. The price increase
is primarily related to overall global market conditions for
soybean oil. Sales of Mexican foods products decreased
$3.3 million compared to the year ended August 31,
2003.

Other Revenues.Other revenues of $141.3 million increased
$18.7 million (15%) during the year ended August 31,
2004 compared to the year ended August 31, 2003. The
majority of other revenue was generated within the Country
Operations and Services and the Grain Marketing segments and
derived primarily from services performed through the Country
Operations and Services segments elevator and agri-service
centers, including grain storage, grain cleaning, fertilizer
spreading, crop protection product spraying and other services
of this nature; the Country Operations and Services
segments financial services, and the Grain Marketing
segments service activities at its export terminals for
loading vessels. Services revenue within the Country Operations
and Services segment increased $5.0 million compared to the
previous year, primarily due to increased commissions on
commodity hedging and insurance services as

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a result of increased market share and expanded
services offerings and safety and loss credits. Grain marketing
services revenues and delivery income increased by
$4.5 million compared to the year ended August 31,
2003. The Energy segment received $2.1 million of sulfur
allotment recovery for the sale of a portion of its sulfur
credits. In addition, CHS received patronage refunds of
$7.7 million during the year ended August 31, 2004, an
increase of $4.5 million (137%) compared to the previous
year. The increase in patronage refunds is primarily the result
of a patronage distribution in one of the Companys
cooperative investments, which was related to gains on legal
settlements and on the sale of a warehouse facility.


Cost of Goods Sold.Cost of goods sold of $10.6 billion increased
$1.5 billion (17%) during the year ended August 31,
2004 compared to the year ended August 31, 2003.

The Energy segment net cost of goods sold
increased by $286.5 million (8%) during the year ended
August 31, 2004 compared to the same period of the prior
year, primarily due to increased average costs, which was
partially offset by reduced volumes. On a more product-specific
basis, the average cost of refined fuels increased by
$0.16 per gallon, which was partially offset by a 4%
decrease in volumes compared to the year ended August 31,
2003. The average cost increase on refined fuels is reflective
of higher input costs at the Companys two crude oil
refineries and higher average prices on the refined products
that are purchased for resale compared to the year ended
August 31, 2003. The average per unit cost of crude oil
purchased for the two refineries increased 15% compared to the
previous fiscal year end. The Company processes approximately
55,000 barrels of crude oil per day at its Laurel, Montana
refinery and 80,000 barrels of crude oil per day at
NCRAs McPherson, Kansas refinery. The average cost of
propane increased $0.11 per gallon, which was partially
offset by a 9% decrease in volumes compared to the year ended
August 31, 2003. Propane volumes were reduced due to a dry
autumn and relatively warm early winter, which was partially
offset by an average cost increase due to higher input costs
compared to the year ended August 31, 2003.

The cost of all grains and oilseed procured by
the Company through its Grain Marketing and Country Operations
and Services segments increased $857.6 million (19%)
compared to the year ended August 31, 2003, primarily the
result of a $0.43 (11%) average cost per bushel increase and an
8% increase in volumes compared to the prior year. In addition
to higher commodity prices, increased shipping costs and the
$18.5 million net effect of the Chinese contract defaults
described above contributed to this increase in cost of goods
sold.

Country operations non-grain cost of goods sold
increased $105.5 million (13%) during the year ended
August 31, 2004 compared to the year ended August 31,
2003, primarily due to an increased average cost per unit on
energy products and crop nutrients, and additional volumes from
acquisitions.

The Processed Grains and Foods segment cost of
goods sold increased by $294.0 million (62%) compared to
the year ended August 31, 2003, which was primarily due to
additional volumes of soybeans processed at the new crushing
plant in Fairmont, Minnesota, and increased cost of raw
materials in oilseed processing.

Marketing, General and
Administrative.Marketing, general and
administrative expenses of $208.3 million for the year
ended August 31, 2004 increased by $24.5 million (13%)
compared to the year ended August 31, 2003. The net
increase includes additional expenses due to increased retiree
benefit expenses of $4.9 million, higher healthcare costs
and other employee related benefits and $5.4 million of
additional bad debt expenses in the Country Operations and
Services segment.

Gain on Sale of
Investment.During the year ended
August 31, 2004, the Company recorded a gain of
$14.7 million within the Energy segment from the sale of a
portion of a petroleum crude oil pipeline investment. NCRA
exercised its right of first refusal to purchase a partial
interest in the pipeline, and subsequently sold a 50% interest
to another third party for proceeds of $25.0 million.

Gain on Legal
Settlements.The Country Operations
and Services segment received cash of $0.7 million and
$10.9 million during the years ended August 31, 2004
and 2003, respectively, from the settlement of a class action
lawsuit alleging illegal price fixing against various feed
vitamin product suppliers.

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Interest.Interest
expense of $51.6 million for the year ended August 31,
2004 increased by $3.0 million (6%) compared to the year
ended August 31, 2003. The average level of short-term
borrowings increased $93.2 million primarily due to
financing higher working capital needs and was partially offset
by an average short-term interest rate decrease of 0.4% during
the year ended August 31, 2004 compared to the year ended
August 31, 2003.

Equity Income from
Investments.Equity income from
investments of $79.0 million for the year ended
August 31, 2004 increased by $31.7 million (67%)
compared to the year ended August 31, 2003. The Company
records equity income or loss from the investments it owns 50%
or less of its proportionate share of income or loss reported by
the entity, without consolidating the revenues and expenses of
the entity in the Companys consolidated statements of
operations. The increase in equity income from investments was
primarily attributable to improved earnings from investments
within the Companys Agronomy segment of
$15.0 million, Grain Marketing segment of
$13.1 million and Processed Grain and Foods segment of
$3.9 million.

The Agronomy segment joint ventures generated
increased earnings of $15.0 million. In April 2004, the
Company finalized the purchase of additional ownership in
Agriliance so that the Company now owns 50%, which accounts for
$7.3 million of the increase. In addition, Agriliance
recorded increased earnings from operations primarily in
wholesale crop protection operations compared to the same period
of a year ago. Agriliance recorded improved earnings on its crop
protection products, which primarily consist of herbicides and
pesticides, due to increased market share. However, the price of
these products continues to decline as many come off patent and
are replaced by cheaper generic brands. Crop nutrient volumes,
which primarily consist of fertilizers and micronutrients, are
down 20% over last year, which partially reduced Agriliance
earnings. Consistently high and volatile domestic prices for
crop nutrient products have created a competitive, global supply
environment.

The Grain Marketing segment recorded increased
earnings of $13.1 million, primarily in two exporting joint
ventures due to increased export demand and favorable ocean
freight spreads from the Pacific Northwest, where the exporting
facilities are located, to the Pacific Rim. These factors
contributed to a $6.8 million increase in equity income
from the Companys investment in TEMCO, a joint venture,
which exports primarily corn and soybeans. Similar conditions
contributed to a $5.2 million improvement in equity income
from the Companys wheat exporting investment in United
Harvest.

The Processed Grains and Foods segment showed
increased earnings of $3.9 million, of which
$3.0 million was from Horizon, a wheat milling joint
venture, due to increased operating efficiencies and demand
growth for whole-grain wheat products. Ventura Foods, an oilseed
based products and packaged foods joint venture, recorded
increased earnings of $0.9 million compared to the previous
year.

Minority Interests.Minority interests of $33.8 million for the year ended
August 31, 2004 increased by $11.9 million (54%)
compared to the year ended August 31, 2003. This increase
was primarily a result of more profitable operations within the
Companys majority-owned subsidiaries compared to the prior
year and the minority interest net effect of the gain on the
sale of the NCRA investment. Substantially all minority
interests relate to NCRA, an approximately 74.5% owned
subsidiary.

Income Taxes.Income
tax expense of $25.7 million for the year ended
August 31, 2004 compares with $12.7 million for the
year ended August 31, 2003, resulting in effective tax
rates of 10.4% and 9.3%, respectively. The federal and state
statutory rate applied to nonpatronage business activity was
38.9% for the years ended August 31, 2004 and 2003. The
income taxes and effective tax rate vary each year based upon
profitability and nonpatronage business activity during each of
the comparable years.



| |                                                           
| | ----------------------------------------------------------
| | Comparison of the Years Ended
    August 31, 2003 and 2002

Net Income.Consolidated net income for the year ended August 31, 2003
was $123.8 million compared to $126.1 million for the
year ended August 31, 2002, which represents a
$2.3 million (2%) decrease. This decrease in profitability
is primarily attributable to decreased earnings in the
Companys Processed Grains and Foods and Grain Marketing
segments, which was partially offset by increased

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earnings within the Energy, Country Operations
and Services and Agronomy segments compared to the year ended
August 31, 2002.


Net Sales.Consolidated net sales of $9.3 billion for the year ended
August 31, 2003 increased $2.1 billion (30%) compared
to the year ended August 31, 2002.

Energy net sales of $3.6 billion increased
$963.6 million (37%) during the year ended August 31,
2003 compared to the year ended August 31, 2002. Sales for
the year ended August 31, 2003 and 2002 were
$3,648.1 million and $2,657.7 million, respectively.
The Company eliminated all intersegment sales from the Energy
segment to the Country Operations and Services segment of
$94.2 million and $67.4 million for the years ended
August 31, 2003 and 2002, respectively. Refined fuels net
sales increased by $783.2 million, of which
$418.0 million was related to a net average price change
and $365.2 million was related to a net volume change. The
sales price of refined fuels increased $0.18 per gallon and
volume increased 17% compared to the year ended August 31,
2002. Refined fuels commodity prices increased due to global
uncertainty in the energy markets brought on by the ensuing war
and the Venezuela disruption. Propane net sales increased by
$137.0 million, of which $75.9 million was related to
a net volume change and $61.1 million was related to a net
average price change. The average sales price of propane
increased by $0.09 per gallon and volume increased by 19%
compared to the year ended August 31, 2002. Domestic
propane inventories were at extremely low levels coming out of
the heating season, which supported a higher selling price.
Refined fuels and propane volume increases were primarily a
result of acquisitions, with the largest acquisition taking
place in November 2001, when the Company purchased for
$32.6 million, the wholesale energy business of Farmland
Industries, Inc. (Farmland), as well as all interest in Country
Energy, LLC a joint venture formerly with Farmland.

Company-wide grain and oilseed net sales of
$4.5 billion increased $1.0 billion (30%) during the
year ended August 31, 2003 compared to the year ended
August 31, 2002. Sales to external customers by the Grain
Marketing segment totaled $4,136.8 million and
$3,211.9 million during the years ended August 31,
2003 and 2002, respectively. Grain sales of the Country
Operations and Services segment to external customers during
these same periods were $343.0 million and
$246.2 million, respectively. Sales of grain between
Country Operations and Services and Grain Marketing segments
during these same periods were $799.4 million and
$685.4 million, respectively. These intersegment sales are
included for segment reporting purposes, but the Company
eliminates all intersegment sales on a consolidated basis. The
net increase in sales was primarily due to an increase of $0.93
(30%) per bushel in the average sales price of all grain and
oilseed marketed by the Company while volumes remained
essentially unchanged from the prior year. The net increase in
company-wide grain and oilseed of $1.0 billion was
primarily related to the price change due to stronger commodity
prices and increased international soybean exports.

Country operations non-grain net sales of
$745.8 million increased by $133.3 million (22%)
during the year ended August 31, 2003 compared to the year
ended August 31, 2002. The net average price and net volume
increased on the majority of farm supply products, which
consists of seed; plant food; energy products; animal health
ingredients, supplements and products; animal health products;
and crop nutrient and crop protection products, compared to the
prior year. In addition, net sales increased $46.4 million
compared to the prior year due to the acquisition of a sunflower
processing plant.

Processed Grains and Foods segment net sales of
$491.2 million decreased $4.3 million (1%) during the
year ended August 31, 2003 compared to the year ended
August 31, 2002. Intersegment sales of $0.7 million
and $0.6 million for the years ended August 31, 2003
and 2002, respectively, have been eliminated. Oilseed processing
and refining net sales increased $81.4 million primarily
due to an average selling price increase of $0.07 per
bushel in refined oilseed. In addition, Mexican Foods sales
increased $4.1 million compared to the prior year. These
sales increases were partially offset by an $89.6 million
decrease in sales due to the formation of Horizon Milling, a
wheat flour milling and processing joint venture that was formed
in January 2002. After that date, the Company accounted for
operating results of Horizon Milling under the equity method of
accounting.

Other Revenues.Other revenues of $122.6 million increased
$15.2 million (14%) during the year ended August 31,
2003 compared to the year ended August 31, 2002. The most
significant increases were

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within the Energy, Grain Marketing and Corporate
and Other segments compared to the prior year. Patronage refunds
received of $3.3 million during the year ended
August 31, 2003, decreased $0.6 million (16%) compared
to the year ended August 31, 2002, due to reduced patronage
dividends from cooperatives.


Cost of Goods Sold.Cost of goods sold of $9.1 billion increased
$2.1 billion (31%) during the year ended August 31,
2003 compared to the year ended August 31, 2002.

The Energy segment net cost of goods sold
increased by $960.5 million (40%) during the year ended
August 31, 2003 compared to the prior year, primarily due
to refined fuels average cost increase of $778.1 million
(46%), which consists of increased average cost of
$0.18 per gallon and volume increases of 17% compared to
the year ended August 31, 2002. In addition, the average
cost of propane increased by $138.1 million (43%), of which
the average cost increased by $0.10 per gallon and volumes
increased by 19% compared to the prior year. Energy cost
increases primarily related to the global effects of higher
input costs and increased volumes primarily as a result of
acquisitions.

The cost of all grains and oilseed procured by
the Company through its Grain Marketing and Country Operations
and Services segments increased by $1.0 billion (30%)
compared to the year ended August 31, 2002 primarily due to
a $0.92 (30%) average cost per bushel increase while volumes
remained essentially unchanged from the prior year. This
increase in cost of goods sold was primarily the result of
higher commodity prices and increased international exports.

Country operations non-grain cost of goods sold
increased by $129.1 million (12%) during the year ended
August 31, 2003 compared to the prior year primarily due to
a sunflower processing plant acquisition and increased average
cost per unit on most farm supply products.

Processed Grains and Foods segment cost of goods
sold increased by $11.0 million (2%) compared to the year
ended August 31, 2002. Oilseed processing and refining cost
of goods sold increased $94.6 million, primarily due to the
increased cost of raw materials related to oilseed refining of
$0.07 per bushel. This increase was partially offset by
decreased cost of goods sold of $89.7 million related to
the formation of Horizon Milling, as previously discussed.

Marketing, General and
Administrative.Marketing, general and
administrative expenses of $183.8 million for the year
ended August 31, 2003 increased by $1.6 million (1%)
compared to the year ended August 31, 2002. The net
increase is primarily due to additional expenses within the
Country Operations and Services segment primarily due to a
sunflower plant acquisition.

Gain on Legal
Settlements.The Country Operations
and Services segment received cash of $10.9 million and
$3.0 million during the years ended August 31, 2003
and 2002, respectively, from the settlement of a class action
lawsuit alleging illegal price fixing against various feed
vitamin product suppliers.

Interest.Interest
expense of $48.7 million for the year ended August 31,
2003 increased by $6.2 million (15%) compared to the year
ended August 31, 2002. The average level of short-term
borrowings increased $88.1 million primarily due to
financing higher working capital needs, which was partially
offset by an average short-term interest rate decrease of 0.4%
during the year ended August 31, 2003 compared to
August 31, 2002. Long-term debt borrowings increased due to
an additional $175.0 million of private placement debt that
was issued in October 2002.

Equity Income from
Investments.Equity income from
investments of $47.3 million for the year ended
August 31, 2003 decreased by $10.8 million (19%)
compared to the year ended August 31, 2002. The Company
records equity income or loss from the investments it owns 50%
or less of for its proportionate share of income or loss
reported by the entity, without consolidating the revenues and
expenses of the entity in the Companys consolidated
statements of operations. The decrease in equity income from
investments was primarily attributable to decreased earnings in
Ventura Foods, which was partially offset by increased earnings
in Agriliance compared to the prior year. During the fiscal year
ended

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August 31, 2003, the Company recorded an
additional 13.1% of income from the CPP business of Agriliance,
as previously discussed.


Minority Interests.Minority interests of $22.0 million for the year ended
August 31, 2003 increased by $6.6 million (43%)
compared to the year ended August 31, 2002. The net change
in minority interests during the year ended August 31, 2003
compared to the prior year was primarily a result of more
profitable operations within the Companys majority-owned
subsidiaries. Substantially all minority interests relate to
NCRA, an approximately 74.5% owned subsidiary.

Income Taxes.Income
tax expense of $12.7 million for the year ended
August 31, 2003 compares with $18.7 million for the
year ended August 31, 2002, resulting in effective tax
rates of 9.3% and 12.9%, respectively. The federal and state
statutory rate applied to nonpatronage business activity was
38.9% for the years ended August 31, 2003 and 2002. The
income taxes and effective tax rate vary each year based upon
profitability and nonpatronage business activity during each of
the comparable years.

Liquidity and Capital Resources

On August 31, 2004, the Company had working
capital, defined as current assets less current liabilities, of
$493.4 million and a current ratio, defined as current
assets divided by current liabilities, of 1.3 to 1.0 compared to
working capital of $458.7 million and a current ratio of
1.3 to 1.0 on August 31, 2003. Working capital increased
during fiscal 2004 by $34.7 million despite capital
expenditures of $245.1 million, primarily because of strong
earnings and the addition of $30.0 million in long-term
debt during this period.

During May 2004, the Company renewed and expanded
its committed lines of revolving credit which are used primarily
to finance inventories and receivables. The previously
established credit lines consisted of a $600 million
364-day revolver and a $100 million three-year revolver.
The new committed credit facilities consist of a
$750 million 364-day revolver and $150 million
three-year revolver. These credit facilities are established
with a syndicate of domestic and international banks, and the
inventories and receivables financed with these loans are highly
liquid. The terms of the new credit facilities are essentially
the same as the terms for the credit facilities they replace. On
August 31, 2004, $115.0 million was outstanding on
these lines of credit. In September 2004, the Company borrowed
$125.0 million from a group of insurance companies on a
long-term basis and used the proceeds to pay down the revolving
lines of credit. The Companys management believes there is
adequate liquidity to cover any increase in net operating assets
and liabilities in the forseeable future.



| |                           
| | --------------------------
| | Cash Flows from Operations

Cash flows from operations are generally affected
by commodity prices. 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.
These factors are described in the cautionary statement at the
beginning of Part I, Item 1 of this Form 10-K,
and may affect net operating assets and liabilities, and
liquidity.

Cash flows provided by operating activities were
$333.3 million and $216.5 million for the years ended
August 31, 2004 and 2003, respectively. Cash used in
operating activities was $35.9 million for the year ended
August 31, 2002. Volatility in cash flows from operations
between fiscal 2004 and 2003 is primarily the result of
increased earnings of $97.5 million (79%) during fiscal
2004 compared to 2003, as well as a decrease in net operating
assets and liabilities as a result of decreased grain and
oilseed inventories. Volatility in cash flows from operations
between fiscal 2003 and 2002 is primarily the result of changing
grain prices.

Operating activities of the Company provided net
cash of $333.3 million during the year ended
August 31, 2004. Net income of $221.3 million, net
non-cash expenses of $54.0 million, and a decrease in net
operating assets and liabilities of $58.0 million, provided
this net cash from operating activities. The

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primary components of net non-cash expenses
included depreciation and amortization of $108.4 million
and minority interests of $33.8 million, which were
partially offset by income from equity investments of
$79.0 million and a pretax gain on the sale of an
investment of $14.7 million. The decrease in net operating
assets and liabilities was caused primarily by a decrease in
grain and oilseed inventories of 25.7 million bushels (63%)
in the Country Operations and Services segment, and
5.2 million bushels (14%) in the Grain Marketing segment.


Operating activities of the Company provided net
cash of $216.5 million during the year ended
August 31, 2003. Net income of $123.8 million and net
non-cash expenses of $98.0 million were partially offset by
a small increase in net operating assets and liabilities of
$5.3 million. The primary components of net non-cash
expenses included depreciation and amortization of
$111.3 million and minority interests of
$22.0 million, which were partially offset by income from
equity investments of $47.3 million. Grain and oilseed
prices on August 31, 2003 remained at the approximate
levels prevailing on August 31, 2002, as market conditions
were similar at the end of both fiscal years. Consequently, net
operating assets and liabilities at August 31, 2003 changed
only slightly compared with those at the prior year-end.

Operating activities of the Company used net cash
of $35.9 million during the year ended August 31,
2002. Net income of $126.1 million and net non-cash
expenses of $62.4 million were offset by an increase in net
operating assets and liabilities of $224.4 million. The
primary components of net non-cash expenses included
depreciation and amortization of $104.0 million and
minority interests of $15.4 million, which were partially
offset by income from equity investments of $58.1 million.
The increase in net operating assets and liabilities was caused
primarily by increases in the prices of the three primary grain
commodities handled by the Company. Grain and oilseed prices
increased considerably at the end of fiscal 2002 in response to
drought conditions in parts of the grain production area, which
reduced overall market supply and resulted in an increase in
grain and oilseed inventory values of $155.6 million
compared to that same inventory category of the prior year. The
market price of spring wheat, soybeans and corn was higher on
August 31, 2002 by $2.15 per bushel (70%),
$1.15 per bushel (24%) and $0.45 per bushel (21%),
respectively, than at the end of the prior fiscal year. These
increases in grain prices also had the affect of increasing
hedging margin deposits, which are carried in other current
assets, and receivables. These and other less significant
factors increased net operating assets and liabilities by
$224.4 million and was the largest use of cash from
operations. A major part of this increase in net operating
assets and liabilities was financed with short-term notes
payable. Because the change in short-term notes payable is shown
in cash flows from financing activities, this source of cash
does not offset the corresponding use of cash as part of the
cash flows from operating activities in the Consolidated
Statements of Cash Flows.

The Company expects its net operating assets and
liabilities to remain relatively constant with the levels on
August 31, 2004 through most of the first quarter of fiscal
2005. Grain prices have not changed materially during the first
two months of fiscal 2005, and harvest for several commodities
have been delayed due to wet weather conditions. Production
forecasts indicate normal to above normal volumes for most
commodities. Anticipation of adequate supply has had the affect
of producing grain prices that are generally lower than the
prices of a year ago. Although crude oil prices are at a near
historical high, related inventories and receivables are turned
in a relatively short period, thus mitigating the effect on
operating assets and liabilities.



| |                                         
| | ----------------------------------------
| | Cash Flows from Investing
    Activities

For the years ended August 31, 2004, 2003
and 2002, the net cash flows used in the Companys
investing activities totaled $181.3 million,
$173.3 million and $147.6 million, respectively.

The acquisition of property, plant and equipment
comprised the primary use of cash totaling $245.1 million,
$175.7 million and $140.2 million for the years ended
August 31, 2004, 2003 and 2002, respectively. These
acquisitions of property, plant and equipment included
$8.5 million and $6.6 million acquired as part of
business acquisitions during the years ended August 31,
2003 and 2002, respectively. Capital expenditures during the
year ended August 31, 2003 included $46.0 million for
the construction of an oilseed processing facility in Fairmont,
Minnesota. The Fairmont facility was essentially complete and

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operational during the first quarter of fiscal
2004. Also during the first quarter of fiscal 2004, the Company
entered into a sale-leaseback transaction for the Fairmont
facility equipment and received cash proceeds of
$19.8 million from the sale. For the year ending
August 31, 2005, the Company expects to spend approximately
$313.9 million for the acquisition of property, plant and
equipment. Capital expenditures primarily related to the
U.S. Environmental Protection Agency (EPA) low sulfur
fuel regulations required by 2006, are expected to be
approximately $87.0 million for the Companys Laurel,
Montana refinery and $311.0 million for NCRAs
McPherson, Kansas refinery, of which $49.2 million has been
spent at the Laurel refinery and $131.0 million has been
spent by NCRA at the McPherson refinery as of August 31,
2004. The Company expects all of these compliance capital
expenditures at the refineries to be complete by
December 31, 2005, and anticipates funding these projects
with a combination of cash flows from operations and debt
proceeds.


In October 2003, the Company and NCRA reached
agreement with the EPA and the State of Montanas
Department of Environmental Quality and the State of Kansas
Department of Health and Environment, regarding the terms of
settlements with respect to reducing air emissions at the
Companys Laurel, Montana and NCRAs McPherson, Kansas
refineries. These settlements are part of a series of similar
settlements that the EPA has negotiated with major refiners
under the EPAs Petroleum Refinery Initiative. The
settlements, which resulted from nearly three years of
discussions, take the form of consent decrees filed with the
U.S. District Court for the District of Montana (Billings
Division) and the U.S. District Court for the District of
Kansas. Each consent decree details specific capital
improvements, supplemental environmental projects and
operational changes that the Company and NCRA have agreed to
implement at the relevant refinery over the next several years.
The consent decrees also require the Company and NCRA to pay
approximately $0.5 million in aggregate civil cash
penalties. The Company and NCRA anticipate that their aggregate
capital expenditures related to these settlements will total
approximately $25.0 million to $30.0 million over the
next seven years. Approximately 50 percent of the
expenditures will be made over the first three years. The
Company does not believe that the settlements will have a
material adverse affect on the Company.

Investments made during the years ended
August 31, 2004, 2003 and 2002 totaled $49.8 million,
$43.5 million and $6.2 million, respectively. During
the year ended August 31, 2004 the Company purchased all of
Farmlands interest in Agriliance for a cash payment of
$27.5 million, as previously discussed. During the year
ended August 31, 2003, the Company purchased an additional
13.1% economic interest of the crop protection business of
Agriliance for cash payment of $34.3 million, as previously
discussed. Also during the year ended August 31, 2004, NCRA
exercised its right of first refusal to purchase a partial
interest in a crude oil pipeline for $16.0 million.

Acquisitions of intangibles were
$0.8 million, and $29.5 million for the years ended
August 31, 2003 and 2002, respectively. During the year
ended August 31, 2002, $26.4 million of the
acquisitions of intangibles were related to the purchase of
Farmlands interest in its wholesale energy business, as
previously discussed, and represented trademarks, tradenames and
non-compete agreements.

Net working capital acquired in business
acquisitions was $13.0 million and $5.8 million,
respectively, during the years ended August 31, 2003 and
2002.

During the years ended August 31, 2004, 2003
and 2002, the changes in notes receivable resulted in decreases
in cash flows of $6.9 million, $6.6 million and
$22.0 million, respectively, primarily from related party
notes receivables at NCRA from its minority owners, Growmark,
Inc. and MFA Oil Company.

Distributions to minority owners for the years
ended August 31, 2004, 2003 and 2002 were
$15.9 million, $4.4 million and $7.4 million,
respectively, and were primarily related to NCRA. NCRAs
cash distributions to members have decreased as a percent of
earnings in 2004, 2003 and 2002 when compared to prior years,
due to the funding requirements for environmental capital
expenditures previously discussed.

Partially offsetting cash outlays in investing
activities were proceeds from the disposition of property, plant
and equipment of $34.5 million, $26.9 million and
$20.2 million for the years ended August 31,

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2004, 2003 and 2002, respectively. During the
year ended August 31, 2004, proceeds of $19.8 million
were from a sale-leaseback transaction, as previously discussed.
During the year ended August 31, 2003, proceeds were
primarily from disposals of propane plants and non-strategic
locations in the Energy segment, sales of equipment and
non-strategic agri-operations locations in the Country
Operations and Services segment, and sales of wheat milling
equipment. During the year ended August 31, 2002, proceeds
were primarily from the disposal of propane plants in the Energy
segment and of non-strategic agri-operations locations in the
Country Operations and Services segment. Also partially
offsetting cash usages were distributions received from joint
ventures and investments totaling $74.6 million,
$44.4 million and $44.0 million for the years ended
August 31, 2004, 2003 and 2002, respectively. During the
year ended August 31, 2004, NCRA exercised its right of
first refusal to purchase a partial interest in a crude oil
pipeline as previously discussed, and subsequently sold a 50%
interest in the same pipeline to another third party for
proceeds of $25.0 million and recorded a pre-tax gain on
the sale of $14.7 million.




| |                                         
| | ----------------------------------------
| | Cash Flows from Financing
    Activities

The Company finances its working capital needs
through short-term lines of credit with a syndication of
domestic and international banks. In May 2004, the Company
renewed and expanded its committed lines of revolving credit.
The previously established credit lines consisted of a
$600.0 million 364-day revolver and a $100.0 million
three-year revolver. The new committed credit facilities consist
of a $750.0 million 364-day revolver and a
$150.0 million three-year revolver. The terms of the new
credit facilities are essentially the same as the terms of the
credit facilities they replaced. In addition to these lines of
credit, the Company has a two-year revolving credit facility
dedicated to NCRA, with a syndication of banks in the amount of
$15.0 million committed. On August 31, 2004 and 2003,
the Company had total short-term indebtedness outstanding on
these various facilities and other short-term notes payable
totaling $116.1 million and $251.1 million,
respectively. On August 31, 2004 interest rates on these
facilities ranged from 2.01% to 2.23%. In October 2002,
$175.0 million received from private placement proceeds was
used to pay down the Companys 364-day credit facility. In
January 2003, $83.0 million of proceeds received from the
issuance of the Companys preferred stock (net of brokers
commissions of $3.2 million), was also used to pay down the
364-day credit facility.

In June 1998, the Company established a five-year
revolving credit facility with a syndication of banks, with
$200.0 million committed, which expired in May 2003.
The Company had a previous outstanding balance on this facility
of $75.0 million on August 31, 2002, of which
repayments of $75.0 million were made during the year ended
August 31, 2003.

The Company finances its long-term capital needs,
primarily for the acquisition of property, plant and equipment,
with long-term agreements with various insurance companies and
banks. In June 1998, the Company established a long-term credit
agreement through the cooperative banks. This facility committed
$200.0 million of long-term borrowing capacity to the
Company, with repayments through fiscal year 2009. The amount
outstanding on this credit facility was $131.2 million and
$137.8 million on August 31, 2004 and 2003,
respectively. Interest rates on August 31, 2004 ranged from
2.27% to 7.13%. Repayments of $6.6 million were made on
this facility during each of the three years ended
August 31, 2004, 2003 and 2002.

Also in June 1998, the Company completed a
private placement offering with several insurance companies for
long-term debt in the amount of $225.0 million with an
interest rate of 6.81%. Repayments are due in equal annual
installments of $37.5 million each in the years 2008
through 2013.

In January 2001, the Company entered into a note
purchase and private shelf agreement with Prudential Insurance
Company. The long-term note in the amount of $25.0 million
has an interest rate of 7.9% and is due in equal annual
installments of approximately $3.6 million, in the years
2005 through 2011. A subsequent note for $55.0 million was
issued in March 2001, related to the private shelf facility. The
$55.0 million note has an interest rate 7.43% and is due in
equal annual installments of approximately $7.9 million, in
the years 2005 through 2011.

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In October 2002, the Company completed a private
placement with several insurance companies for long-term debt in
the amount of $175.0 million, which was layered into two
series. The first series of $115.0 million has an interest
rate of 4.96% and is due in equal semi-annual installments of
approximately $8.8 million during the years 2007 through
2013. The second series of $60.0 million has an interest
rate of 5.60% and is due in equal semi-annual installments of
approximately $4.6 million during fiscal years 2012 through
2018.

In March 2004, the Company entered into a note
purchase and private shelf agreement with Prudential Capital
Group, primarily for the purpose of financing the purchase of
Farmlands interest in Agriliance, as previously discussed.
In April 2004, the Company borrowed $30.0 million under
this arrangement. One long-term note in the amount of
$15.0 million has an interest rate of 4.08% and is due in
full at the end of the six-year term in 2010. Another long-term
note in the amount of $15.0 million has an interest rate of
4.39% and is due in full at the end of the seven-year term in
2011.

Subsequent to the year ended August 31, 2004
(September 21, 2004), the Company entered into a private
placement with several insurance companies for long-term debt in
the amount of $125.0 million with an interest rate of
5.25%. The debt is due in equal annual installments of
$25.0 million during the fiscal years 2011 through 2015.

The Company, through NCRA, had revolving term
loans outstanding of $12.0 million and $15.0 million
for the years ended August 31, 2004 and 2003, respectively.
Interest rates on August 31, 2004 ranged from 6.48% to
6.99%. Repayments of $3.0 million were made during each of
the three years ended August 31, 2004, 2003 and 2002.

On August 31, 2004, the Company had total
long-term debt outstanding of $683.8 million, of which
$155.8 million was bank financing, $510.0 million was
private placement debt and $18.0 million was industrial
development revenue bonds and other notes and contracts payable.
On August 31, 2003, the Company had long-term debt
outstanding of $663.2 million. The Companys long-term
debt is unsecured except for other notes and contracts in the
amount of $10.0 million; however, restrictive covenants
under various agreements have requirements for maintenance of
minimum working capital levels and other financial ratios. The
Company was in compliance with all debt covenants and
restrictions as of August 31, 2004. The aggregate amount of
long-term debt payable as of August 31, 2004 was as follows
(dollars in thousands):

|           |  |   |         | 
|---------- |  | - | ------- | 
|2005       |  | $ | 35,117  | 
|2006       |  |   | 35,582  | 
|2007       |  |   | 60,122  | 
|2008       |  |   | 98,626  | 
|2009       |  |   | 117,285 | 
|Thereafter |  |   | 337,086 | 
|           |  |   |         | 
|           |  | $ | 683,818 | 
|           |  |   |         | 

During the years ended August 31, 2004, 2003
and 2002, the Company borrowed on a long-term basis
$35.5 million, $175.0 million and $30.0 million,
respectively, and during the same periods repaid long-term debt
of $15.3 million, $89.5 million and
$18.0 million, respectively.

In accordance with the bylaws and by action of
the Board of Directors, annual net earnings from patronage
sources are distributed to consenting patrons following the
close of each fiscal year. Patronage refunds are calculated
based on amounts using financial statement earnings. The cash
portion of the patronage distribution is determined annually by
the Board of Directors, with the balance issued in the form of
capital equity certificates. The patronage earnings from the
fiscal year ended August 31, 2003 were primarily
distributed during the second quarter of the year ended
August 31, 2004. The cash portion of this distribution
deemed by the Board of Directors to be 30% was
$28.7 million. During the years ended

40



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##### Table of Contents



August 31, 2003 and 2002, the Company
distributed cash patronage of $26.5 million and
$40.1 million, respectively.


Cash patronage for the year ended August 31,
2004, deemed by the Board of Directors to be 30% and to be
distributed in fiscal year 2005, is expected to be approximately
$50.1 million and is classified as a current liability on
the August 31, 2004 consolidated balance sheet.

Effective September 1, 2004, redemptions of
capital equity certificates approved by the Board of Directors
will be divided into two pools, one for non-individuals
(primarily member cooperatives) who will participate in an
annual pro-rata program for equities older than 10 years,
and another for individual members who are eligible for equity
redemptions at age 72 or upon death. The amount that each
non-individual member receives under the pro-rata program in any
year will be determined by multiplying the dollars available for
pro-rata redemptions that year as determined by the Board of
Directors, by a fraction, the numerator of which is the amount
of patronage certificates older than 10 years held by that
member, and the denominator is the sum of the patronage
certificates older than 10 years held by all eligible
non-individuals. For the years ended August 31, 2004, 2003
and 2002, the Company redeemed in cash, patronage related
equities in accordance with authorization from the Board of
Directors in the amounts of $10.3 million,
$31.1 million and $31.1 million, respectively. An
additional $13.0 million of capital equity certificates
were redeemed in fiscal 2004, by issuance of shares of the
Companys 8% Cumulative Redeemable Preferred Stock (New
Preferred) pursuant to a registration statement on Form S-2
filed with the Securities and Exchange Commission. The amount of
equities redeemed with each share of preferred stock issued was
$27.10, which was the closing price per share of the stock on
the NASDAQ National Market on March 2, 2004. On
August 31, 2004, the Company had 4,226,428 shares of
the New Preferred outstanding with a total redemption value of
approximately $105.7 million, excluding accumulated
dividends.

The Company expects cash redemptions related to
the year ended August 31, 2004, to be distributed in fiscal
year 2005, to be approximately $32.1 million and are
classified as a current liability on the August 31, 2004
consolidated balance sheet. The Company expects to redeem an
additional $20.0 million of capital equity certificates in
fiscal year 2005 by issuing shares of the Companys New
Preferred.

In 2001 and 2002 the Company issued
9,454,874 shares of 8% Preferred Stock (Old Preferred). In
late 2002, the Company suspended sales of the Old Preferred, and
on February 25, 2003 the Company filed a post-effective
amendment to terminate the offering of the Old Preferred shares.
In January 2003, the Board of Directors authorized the sale and
issuance of up to 3,500,000 shares of 8% Cumulative
Redeemable Preferred Stock (New Preferred) at a price of
$25.00 per share. The Company filed a registration
statement on Form S-2 with the Securities and Exchange
Commission registering 3,000,000 shares of the New
Preferred (with an additional over-allotment option of
450,000 shares granted to the underwriters), which was
declared effective on January 27, 2003. The shares were
subsequently sold for gross proceeds of $86.3 million
(3,450,000 shares). The New Preferred is listed on the
NASDAQ National Market. Expenses related to the issuance of the
New Preferred were $3.8 million.

On March 5, 2003, the Companys Board
of Directors authorized the redemption and conversion of the Old
Preferred shares. A redemption notification and a conversion
election form were sent to holders of the Old Preferred shares
on March 21, 2003 explaining that on April 25, 2003
all shares of the Old Preferred would be redeemed by the Company
for $1.00 per share unless they were converted into shares
of the Companys New Preferred. The conversion did not
change the base liquidation amount or dividend amount of the Old
Preferred, since 25 shares of the Old Preferred converted
to 1 share of the New Preferred. The total Old Preferred
converted to the New Preferred was 7,452,439 shares, and
the balance of the Old Preferred (2,002,435 shares) was
redeemed in cash at $1.00 per share.

The New Preferred accumulates dividends at a rate
of 8% per year, and dividends are payable quarterly.

41



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##### Table of Contents



Off Balance Sheet Financing
Arrangements



| |                   
| | ------------------
| | Lease Commitments:

The Company has commitments under operating
leases for various refinery, manufacturing and transportation
equipment, rail cars, vehicles and office space. Some leases
include purchase options at not less than fair market value at
the end of the lease term.

Total rental expense for all operating leases,
net of rail car mileage credits received from the railroad and
sublease income for the years ended August 31, 2004, 2003
and 2002, was $35.3 million, $31.7 million and
$30.7 million, respectively.

Minimum future lease payments required under
noncancellable operating leases as of August 31, 2004, were
as follows:

|                                    |  |                       |       | 
|----------------------------------- |  | --------------------- | ----- | 
|                                    |  | Total                
|                                    |  |                      
|                                    |  | (Dollars in millions)
|2005                                |  | $                     | 30.4  | 
|2006                                |  |                       | 24.5  | 
|2007                                |  |                       | 20.0  | 
|2008                                |  |                       | 16.6  | 
|2009                                |  |                       | 12.0  | 
|Thereafter                          |  |                       | 19.3  | 
|                                    |  |                       |       | 
|Total minimum future lease payments |  | $                     | 122.8 | 
|                                    |  |                       |       | 



| |            
| | -----------
| | Guarantees:

The Company is a guarantor for lines of credit
for related companies of which $32.0 million was
outstanding on August 31, 2004. The Companys bank
covenants allow maximum guarantees of $150.0 million. In
addition, the Companys bank covenants allow for guarantees
dedicated solely for NCRA in the amount of $125.0 million.
All outstanding loans with respective creditors are current as
of August 31, 2004.

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##### Table of Contents





| |      
| | -----
| | Debt:

There is no material off balance sheet debt.

Contractual Obligations

The Company had certain contractual obligations
at August 31, 2004, which require the following payments to
be made:

|                        |  |                        |           |           |  |           |           |           |  |         |         |  |  |   |         |  |  |   |         | 
|----------------------- |  | ---------------------- | --------- | --------- |  | --------- | --------- | --------- |  | ------- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                        |  |                       
|                        |  | Payments Due by Period
|                        |  |                       
|                        |  |                        |           | Less than |  |           |           | More than
|Contractual Obligations |  | Total                  |           | 1 Year    |  | 1-3 Years |           | 3-5 Years |  | 5 Years
|                        |  |                        |           |           |  |           |           |           |  |        
|                        |  |                       
|                        |  | (dollars in thousands)
|Notes payable *         |  | $                      | 116,115   |           |  | $         | 116,115   |           |  |         |         |  |  |   |         |  |  |   |         | 
|Long-term debt *        |  |                        | 683,818   |           |  |           | 35,117    |           |  | $       | 95,704  |  |  | $ | 215,911 |  |  | $ | 337,086 | 
|Operating leases        |  |                        | 122,795   |           |  |           | 30,422    |           |  |         | 44,518  |  |  |   | 28,605  |  |  |   | 19,250  | 
|Purchase obligations ** |  |                        | 1,461,168 |           |  |           | 1,231,274 |           |  |         | 221,669 |  |  |   | 1,245   |  |  |   | 6,980   | 
|Other liabilities ***   |  |                        | 29,770    |           |  |           |           |           |  |         | 19,592  |  |  |   | 8,416   |  |  |   | 1,762   | 
|                        |  |                        |           |           |  |           |           |           |  |         |         |  |  |   |         |  |  |   |         | 
|Total obligations       |  | $                      | 2,413,666 |           |  | $         | 1,412,928 |           |  | $       | 381,483 |  |  | $ | 254,177 |  |  | $ | 365,078 | 
|                        |  |                        |           |           |  |           |           |           |  |         |         |  |  |   |         |  |  |   |         | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   | Included on the consolidated balance sheet.                                                                                                                                                                                                                                                                                                                                                                                
|**  | Purchase obligations are legally binding and
    enforceable agreements to purchase goods or services that
    specify all significant terms, including fixed or minimum
    quantities; fixed, minimum, or variable price provisions; and
    timing of the transactions. Of the total purchase obligations
    $773.9 million is included in accounts payable and accrued
    expenses on the consolidated balance sheet.
|*** | Other liabilities includes deferred compensation,
    deferred income taxes, accrued turnaround and contractual
    redemptions, and is included on the consolidated balance sheet.
    Of the total other liabilities on the consolidated balance sheet
    of $148.5 million, the timing of the payments of
    $118.8 million of such liabilities cannot be determined.                                                 

Critical Accounting Policies

The consolidated financial statements of the
Company are prepared in conformity with accounting principles
generally accepted in the United States of America. The
preparation of these consolidated financial statements requires
the use of estimates as well as managements judgments and
assumptions regarding matters that are subjective, uncertain or
involve a high degree of complexity, all of which affect the
results of operations and financial condition for the periods
presented. The Company believes that of its significant
accounting policies, the following may involve a higher degree
of estimates, judgments, and complexity.



| |                                     
| | ------------------------------------
| | Allowances for Doubtful
    Accounts

The allowances for doubtful accounts are
maintained at a level considered appropriate by management based
on analyses of credit quality for specific accounts, historical
trends of charge-offs and recoveries, and current and projected
economic, market and other conditions. Different assumptions,
changes in economic circumstances or the deterioration of the
financial condition of the Companys customers could result
in additional provisions to the allowances for doubtful accounts
and increased bad debt expense.



| |                                     
| | ------------------------------------
| | Inventory Valuation and
    Reserves

Grain, processed grains, oilseed and processed
oilseeds are stated at net realizable values, which approximates
market values. All other inventories are stated at the lower of
cost or market. The cost of certain energy inventories
(wholesale refined products, crude oil and asphalt), are
determined on the last-in, first-out (LIFO) method; all
other energy inventories are valued on the first-in, first-out

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(FIFO) and average cost methods. Estimates
are used in determining the net realizable value of grain and
oilseed and processed grains and oilseeds inventories. These
estimates include the measurement of grain in bins and other
storage facilities, which use formulas in addition to actual
measurements taken to arrive at appropriate quantity. Other
determinations made by management include quality of the
inventory and estimates for freight. Grain shrink reserves and
other reserves that account for spoilage also affect inventory
valuations. If estimates regarding the valuation of inventories
or the adequacy of reserves are less favorable than
managements assumptions, then additional reserves or
write-downs of inventories may be required.




| |                                     
| | ------------------------------------
| | Derivative Financial
    Instruments

The Company enters into exchange-traded commodity
futures and options contracts to hedge its exposure to price
fluctuations on energy, grain and oilseed transactions to the
extent considered practicable for minimizing risk. The Company
does not use derivatives for speculative purposes. Futures and
options contracts used for hedging are purchased and sold
through regulated commodity exchanges. Fluctuations in inventory
valuations, however, may not be completely hedged, due in part
to the absence of satisfactory hedging facilities for certain
commodities and geographical areas and in part to the
Companys assessment of its exposure from expected price
fluctuations. The Company also manages its risks by entering
into fixed-price purchase contracts with pre-approved producers
and establishing appropriate limits for individual suppliers.
Fixed-price sales contracts are entered into with customers of
acceptable creditworthiness, as internally evaluated. The fair
value of futures and options contracts are determined primarily
from quotes listed on regulated commodity exchanges. Fixed-price
purchase and sales contracts are with various counterparties,
and the fair values of such contracts are determined from the
market price of the underlying product. The Company is exposed
to loss in the event of nonperformance by the counterparties to
the contracts, and therefore, contract values are reviewed and
adjusted to reflect potential nonperformance.



| |                                              
| | ---------------------------------------------
| | Pension and Other Postretirement
    Benefits

Pension and other postretirement benefits costs
and obligations are dependent on assumptions used in calculating
such amounts. These assumptions include discount rates, health
care cost trend rates, benefits earned, interest costs, expected
return on plan assets, mortality rates, and other factors. In
accordance with accounting principles generally accepted in the
United States of America, actual results that differ from the
assumptions are accumulated and amortized over future periods
and, therefore, generally affect recognized expenses and the
recorded obligations in future periods. While management
believes that the assumptions used are appropriate, differences
in actual experience or changes in assumptions may affect the
Companys pension and other postretirement obligations and
future expenses.



| |                    
| | -------------------
| | Deferred Tax Assets

The Company assesses whether a valuation
allowance is necessary to reduce its deferred tax assets to the
amount that it believes is more likely than not to be realized.
While the Company has considered future taxable income as well
as other factors in assessing the need for the valuation
allowance, in the event that the Company were to determine that
it would not be able to realize all or part of its net deferred
tax assets in the future, an adjustment to the deferred tax
assets would be charged to income in the period such
determination was made.



| |                  
| | -----------------
| | Long-Lived Assets

Depreciation and amortization of the
Companys property, plant and equipment is provided on the
straight-line 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.

44



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##### Table of Contents



All long-lived assets, including property plant
and equipment, goodwill, investments in unconsolidated
affiliates and other identifiable intangibles, are evaluated for
impairment on the basis of undiscounted cash flows at least
annually for goodwill, and 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. Estimated fair market value is generally measured by
discounting estimated future cash flows. Considerable management
judgment is necessary to estimate discounted future cash flows
and may differ from actual.



| |                          
| | -------------------------
| | Environmental Liabilities

Liabilities, including legal costs, related to
remediation of contaminated properties are recognized when the
related costs are considered probable and can be reasonably
estimated. Estimates of these costs are based on current
available facts, existing technology, undiscounted site-specific
costs and currently enacted laws and regulations. Recoveries, if
any, are recorded in the period in which recovery is considered
probable. It is often difficult to estimate the cost of
environmental compliance, remediation and potential claims given
the uncertainties regarding the interpretation and enforcement
of applicable environmental laws and regulations, the extent of
environmental contamination and the existence of alternate
cleanup methods. All liabilities are monitored and adjusted as
new facts or changes in law or technology occur and management
believes adequate provisions have been made for environmental
liabilities. Changes in facts or circumstances may have an
adverse impact on the Companys financial results.

Effect of Inflation and Foreign Currency
Transactions

The Company believes that inflation and foreign
currency fluctuations have not had a significant effect on its
operations.

Recent Accounting Pronouncements

In May 2003, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities
and Equity, which establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that
an issuer classify a financial instrument that is within its
scope as a liability (or an asset in certain circumstances).
SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period
beginning after June 15, 2003. The Statement is to be
implemented by reporting the cumulative effect of a change in an
accounting principle for financial instruments created before
the issuance date of the Statement and still existing at the
beginning of the interim period of adoption. Adoption of this
standard did not have a material effect on the Company.

In December 2003, the FASB issued
SFAS No. 132R, Employers Disclosures about
Pensions and Other Postretirement Benefits. This statement
requires additional disclosures to be made by employers
regarding pensions and other postretirement benefit plans, but
does not change the measurement or recognition of those plans.
Under this Statement, the disclosure provisions regarding
foreign plans and estimated future benefit payments are
effective for fiscal years ending after December 15, 2003,
and interim periods beginning after December 15, 2003. The
Company has adopted the interim and annual disclosure provisions
of this Statement during the current fiscal year.

In December 2003, the FASB revised FASB
Interpretation No. 46, Consolidation of Variable
Interest Entities. The interpretation addresses
consolidation of certain entities in which equity investors do
not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial
support from other parties. It also requires consolidation by
the primary beneficiary. For public entities the interpretation
applies to interests in variable interest entities for periods
ending after March 15, 2004, the Companys third
quarter. Adoption of this standard did not have an effect on the
Company.

45



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##### Table of Contents



On May 19, 2004, the FASB issued a FASB
Staff Position (FSP) regarding SFAS No. 106,
Employers Accounting for Postretirement Benefits
Other Than Pensions. FSP 106-2, Accounting and
Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 discusses
the effect of the Medicare Prescription Drug, Improvement and
Modernization Act (the Act) enacted on December 8, 2003.
FSP 106-2 considers the effect of the two new features
introduced in the Act in determining accumulated postretirement
benefit obligation (APBO) and net periodic postretirement
benefit cost, which may serve to reduce a companys
postretirement benefit costs. Companies may elect to defer
accounting for this benefit or may attempt to reflect the best
estimate of the impact of the Act on net current periodic costs
currently. The Company has chosen to defer accounting for the
benefit until the FASB issues final accounting guidance to
resolve various uncertainties related to this legislation. The
Companys measures of APBO and net periodic postretirement
benefit costs, as of and for the year ended August 31,
2004, do not reflect the effects of the Act as permitted by the
FSP.

In March 2004, the FASB Emerging Issues Task
Force (EITF) reached a consensus on and the FASB ratified
EITF Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments (EITF 03-1). EITF 03-1 provides
guidance for evaluating whether an investment is
other-than-temporarily impaired. On September 30, 2004, the
FASB issued FSP EITF 03-1-1, Effective Date of
Paragraphs 10-20 of EITF Issue No. 03-1, The
Meaning of Other-Than-Temporary Impairment and its Application
to Certain Investments, which delayed the effective
date of the application guidance on impairment of securities
included within EITF 03-1. The Company is still evaluating
the potential impact of the adoption of EITF 03-1.




Item 7A.     Quantitative
and Qualitative Disclosures About Market Risk

Commodity Price Risk

The Company utilizes futures and options
contracts offered through regulated commodity exchanges to
reduce price risk. The Company is exposed to risk of loss in the
market value of inventories and fixed or partially fixed
purchase and sales contracts. In order to reduce that risk, the
Company generally takes opposite and offsetting positions using
futures contracts or options.

Certain commodities cannot be hedged with futures
or options contracts because such contracts are not offered for
these commodities by regulated commodity exchanges. Inventories
and purchase contracts for those commodities are hedged with
forward sales contracts, to the extent practical, in order to
arrive at a net commodity position within the formal position
limits set by the Company and deemed prudent for each of those
commodities. Commodities for which futures contracts and options
are available are also typically hedged first with forward
contracts, with futures and options used to hedge within
position limits the remaining portion. These futures and options
contracts and forward purchase and sales contracts used to hedge
against commodity price changes are effective economic hedges of
price risk, but they are not designated as, or accounted for as,
hedging instruments for accounting purposes.

Unrealized gains and losses on futures contracts
and options used as economic hedges of grain and oilseed
inventories and fixed-price contracts are recognized in cost of
goods sold for financial reporting using market-based prices.
Inventories and fixed-price contracts are marked to fair value
using market-based prices so that gains or losses on the
derivative contracts are offset by gains or losses on
inventories and fixed priced contracts during the same
accounting period.

Unrealized gains and losses on futures contracts
and options used as economic hedges of energy inventories and
fixed-price contracts are recognized in cost of goods sold for
financial reporting using market-based prices. The inventories
hedged with these derivatives are valued at the lower of cost or
fair value, and the fixed-price contracts are marked to fair
value using market-based prices. Certain fixed-price contracts
related to propane in the Energy segment meet the normal
purchase and sales exemption, and thus are not required to be
marked to fair value.

46



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##### Table of Contents



A 10% adverse change in market prices would not
materially affect the Companys results of operations,
financial position or liquidity, since the Companys
operations have effective economic hedging requirements as a
general business practice.

Interest Rate Risk

The Company manages interest expense using a mix
of fixed and floating rate debt. These debt instruments are
carried at amounts approximating estimated fair value.
Short-term debt used to finance inventories and receivables, is
represented by notes payable within thirty days or less so that
the blended interest rate to the Company for all such notes
approximates current market rates. Long-term debt used to
finance non-current assets carries various fixed interest rates
and is payable at various dates to minimize the effect of market
interest rate changes. The effective interest rate to the
Company on fixed rate debt outstanding on August 31, 2004,
was approximately 6.4%; a 10% adverse change in market rates
would not materially affect the Companys results of
operations, financial position or liquidity.

In fiscal years 2002 and 2004, the Company
entered into interest rate treasury lock instruments to secure
the interest rates related to a portion of its private placement
debts issued on October 18, 2002, and September 21,
2004. These instruments were designated and are effective as
cash flow hedges for accounting purposes, and accordingly, the
net loss on settlements were recorded as a component of other
comprehensive income. Interest expense for the years ended
August 31, 2004 and 2003, includes $0.9 million and
$0.7 million, respectively, related to the interest rate
derivatives. The additional interest expense is an offset to the
lower actual interest paid on the outstanding debt instruments.

Foreign Currency Risk

The Company conducts essentially all of its
business in U.S. dollars, except for grain marketing
operations in Brazil and some purchases of products from Canada,
and had minimal risk regarding foreign currency fluctuations
during 2004 and in prior years. Foreign currency fluctuations
do, however, impact the ability of foreign buyers to purchase
U.S. agricultural products and the competitiveness of
U.S. agricultural products compared to the same products
offered by alternative sources of world supply.






|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

The financial statements listed in 15(a)(1) are
set forth beginning on page F-1. Supplementary financial
information required by Item 302 of Regulation S-K for
the years ended August 31, 2004 and 2003 is presented
below. Financial statement schedules are omitted because they
are not applicable or the required information is shown in the
financial statements or notes thereto.

|               |  |                        |           |             |  |        |           |           |  |   |           |  |  |   |           | 
|-------------- |  | ---------------------- | --------- | ----------- |  | ------ | --------- | --------- |  | - | --------- |  |  | - | --------- | 
|               |  |                        |           |            
|               |  |                        |           | 2004       
|               |  | November 30,           |           |            
|               |  | 2003                   |           | February 28 |  | May 31 |           | August 31
|               |  |                        |           |             |  |        |           |          
|               |  |                       
|               |  | (unaudited)           
|               |  | (dollars in thousands)
|Net sales      |  | $                      | 2,489,344 |             |  | $      | 2,654,596 |           |  | $ | 2,817,529 |  |  | $ | 2,947,864 | 
|Total revenues |  |                        | 2,522,377 |             |  |        | 2,689,007 |           |  |   | 2,860,730 |  |  |   | 2,978,522 | 
|Gross profit   |  |                        | 107,847   |             |  |        | 60,908    |           |  |   | 126,495   |  |  |   | 151,141   | 
|Net income     |  |                        | 50,739    |             |  |        | 8,511     |           |  |   | 81,389    |  |  |   | 80,693    | 

|                  |  |                        |           |             |  |        |           |           |  |   |           |  |  |   |           | 
|----------------- |  | ---------------------- | --------- | ----------- |  | ------ | --------- | --------- |  | - | --------- |  |  | - | --------- | 
|                  |  |                        |           |            
|                  |  |                        |           | 2003       
|                  |  | November 30,           |           |            
|                  |  | 2002                   |           | February 28 |  | May 31 |           | August 31
|                  |  |                        |           |             |  |        |           |          
|                  |  |                       
|                  |  | (unaudited)           
|                  |  | (dollars in thousands)
|Net sales         |  | $                      | 2,400,596 |             |  | $      | 2,328,154 |           |  | $ | 2,220,455 |  |  | $ | 2,321,529 | 
|Total revenues    |  |                        | 2,435,851 |             |  |        | 2,353,845 |           |  |   | 2,250,877 |  |  |   | 2,352,739 | 
|Gross profit      |  |                        | 97,292    |             |  |        | 52,409    |           |  |   | 98,410    |  |  |   | 84,646    | 
|Net income (loss) |  |                        | 40,356    |             |  |        | (4,100    | )         |  |   | 52,173    |  |  |   | 35,412    | 

47



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##### Table of Contents








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

None.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

Under the supervision and with the participation
of our management, including our Chief Executive Officer and
Chief Financial Officer, we evaluated the effectiveness of the
design and operation of our disclosure controls and procedures
(as defined in Rule 13a-15(e) under the Securities Exchange
Act of 1934 (the Exchange Act)) as of
August 31, 2004. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that, as
of that date, our disclosure controls and procedures were
effective.

During our fourth fiscal quarter, there was no
change in our internal control over financial reporting (as
defined in Rule 13a-15(f) under the Exchange Act) that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.

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##### Table of Contents






PART III.






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant




BOARD OF DIRECTORS

The table below lists the directors of the
Company as of August 31, 2004.

|                 |                                                        |     |    |          |  |       |   |  |  |  |      |  | 
|---------------- | ------------------------------------------------------ | --- | -- | -------- |  | ----- | - |  |  |  | ---- |  | 
|                 |                                                        |     |    | Director |  |      
|Name and Address |                                                        | Age |    | District |  | Since
|                 |                                                        |     |    |          |  |      
|Bruce Anderson   |                                                        |     | 52 |          |  |       | 3 |  |  |  | 1995 | 
|                 | 13500  42nd St NE
    Glenburn, ND 58740-9564         |     |    |          |  |       |   |  |  |  |      |  | 
|Robert Bass      |                                                        |     | 50 |          |  |       | 5 |  |  |  | 1994 | 
|                 | E 6391 Bass Road
    Reedsburg, WI 53959               |     |    |          |  |       |   |  |  |  |      |  | 
|David Bielenberg |                                                        |     | 55 |          |  |       | 6 |  |  |  | 2002 | 
|                 | 16425 Herigstad Road NE
    Silverton, Oregon 97381    |     |    |          |  |       |   |  |  |  |      |  | 
|Dennis Carlson   |                                                        |     | 43 |          |  |       | 3 |  |  |  | 2001 | 
|                 | 3255  50th Street
    Mandan, ND 58554                |     |    |          |  |       |   |  |  |  |      |  | 
|Curt Eischens    |                                                        |     | 52 |          |  |       | 1 |  |  |  | 1990 | 
|                 | 2153  330th St North
    Minneota, MN 56264-1880      |     |    |          |  |       |   |  |  |  |      |  | 
|Robert Elliott   |                                                        |     | 54 |          |  |       | 8 |  |  |  | 1996 | 
|                 | 324 Hillcrest
    Alliance, NE 69301                   |     |    |          |  |       |   |  |  |  |      |  | 
|Steve Fritel     |                                                        |     | 49 |          |  |       | 3 |  |  |  | 2003 | 
|                 | 2851 77th Street NE
    Barton, ND 58384               |     |    |          |  |       |   |  |  |  |      |  | 
|Robert Grabarski |                                                        |     | 55 |          |  |       | 5 |  |  |  | 1999 | 
|                 | 1770 Highway 21
    Arkdale, WI 54613                  |     |    |          |  |       |   |  |  |  |      |  | 
|Jerry Hasnedl    |                                                        |     | 58 |          |  |       | 1 |  |  |  | 1995 | 
|                 | 12276  150th Avenue SE
    St. Hilaire, MN 56754-9776 |     |    |          |  |       |   |  |  |  |      |  | 
|Glen Keppy       |                                                        |     | 57 |          |  |       | 7 |  |  |  | 1999 | 
|                 | 21316  155th Avenue
    Davenport, IA 52804           |     |    |          |  |       |   |  |  |  |      |  | 
|James Kile       |                                                        |     | 56 |          |  |       | 6 |  |  |  | 1992 | 
|                 | 508 W. Bell Lane
    St. John, WA 99171                |     |    |          |  |       |   |  |  |  |      |  | 
|Randy Knecht     |                                                        |     | 54 |          |  |       | 4 |  |  |  | 2001 | 
|                 | 40193  112th Street
    Houghton, SD 57449            |     |    |          |  |       |   |  |  |  |      |  | 
|Michael Mulcahey |                                                        |     | 56 |          |  |       | 1 |  |  |  | 2003 | 
|                 | 8109 360th Avenue
    Waseca, MN 56093                 |     |    |          |  |       |   |  |  |  |      |  | 
|Richard Owen     |                                                        |     | 50 |          |  |       | 2 |  |  |  | 1999 | 
|                 | PO Box 129
    Geraldine, MT 59446                     |     |    |          |  |       |   |  |  |  |      |  | 

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|                     |                                                    |     |    |          |  |       |   |  |  |  |      |  | 
|-------------------- | -------------------------------------------------- | --- | -- | -------- |  | ----- | - |  |  |  | ---- |  | 
|                     |                                                    |     |    | Director |  |      
|Name and Address     |                                                    | Age |    | District |  | Since
|                     |                                                    |     |    |          |  |      
|Duane Stenzel        |                                                    |     | 58 |          |  |       | 1 |  |  |  | 1993 | 
|                     | 62904  295th Street
    Wells, MN 56097           |     |    |          |  |       |   |  |  |  |      |  | 
|Michael Toelle       |                                                    |     | 42 |          |  |       | 1 |  |  |  | 1992 | 
|                     | 5085 St. Anthony Drive
    Browns Valley, MN 56219 |     |    |          |  |       |   |  |  |  |      |  | 
|Merlin Van Walleghen |                                                    |     | 68 |          |  |       | 4 |  |  |  | 1993 | 
|                     | 24106  408th Avenue
    Letcher, SD 57359-6021    |     |    |          |  |       |   |  |  |  |      |  | 

Bruce Anderson, assistant secretary-treasurer(1995): Served four years in the North
Dakota House of Representatives, former board member with North
Dakota Farmers Union and Farmers Union Mutual Insurance Company.
Vice chairman of the North Dakota Agricultural Products
Utilization Commission. Raises small grains near Glenburn, N.D.
Mr. Andersons principal occupation has been farming
for the last five years or longer.

Robert Bass, first vice chairman(1994): Chairman of board audit
committee. Also director of Wisconsin Federation of
Cooperatives, plus Co-op Country Partners, Baraboo, Wis., for
15 years, seven as president. Graduate of the Madison Area
Technical College Farm Training Program and holds a B.S. degree
in agricultural and extension education from the University of
WisconsinMadison. Former high school vocational
agricultural teacher. Operates a 500-acre dairy and feed grain
farm near Reedsburg, Wis. Mr. Bass principal
occupation has been farming for the last five years or longer.

David Bielenberg(2002): Director of Wilco Farmers
Cooperative of Mt. Angel, Ore., since 1989, including five years
as chairman. Chair of the East Valley Water District, member of
American Society of Agricultural Engineers and Oregon Wheat
Growers League. Holds a B.S. degree in Agricultural Engineering
from Oregon State University and is a graduate of the Texas
A&M University executive program for agricultural producers.
Operates a diversified vegetable, fruit and horticultural farm
near Silverton, Ore. Mr. Bielenbergs principal
occupation has been farming for the last five years or longer.

Dennis Carlson(2001): Chairman, Farmers Union
Oil Co. of Bismarck/ Mandan, N.D., serving since 1989.
Operates a diversified wheat, sunflower and cow-calf operation
near Mandan. Mr. Carlsons principal occupation has
been farming for the last five years or longer.

Curt Eischens(1990): Has served as director of
Farmers Co-op Association, Canby, Minn. for nine years, eight as
board chairman. Chair of the Minnesota Association of
Cooperatives, member of Minnesota Soybean Association, Minnesota
Corn Growers, Minnesota Farmers Union, Minnesota FFA Alumni
Association and National FFA Alumni Association. Graduate of the
Canby Area Technical College Farm Management Program. Operates a
corn and soybean farm near Canby. Mr. Eischens
principal occupation has been farming for the last five years or
longer.

Robert Elliott(1996): Served on the boards of
Western Cooperative Alliance and New Alliance Bean and Grain
Company. Past president of Nebraska Wheat Growers Association
and president of Hemingford Scholarship Foundation. Holds B.S.
and M.S. degrees in agriculture from California Polytechnic
University. Raises 6,000 acres of wheat, corn, dry beans,
sugar beets and sunflowers. Mr. Elliotts principal
occupation has been farming for the last five years or longer.

Steve Fritel(2003):
Served more that two decades on the board of Rugby (N.D.)
Farmers Union Elevator and nearly five years on the former CHS
Wheat Milling Defined Member Board. Currently director of North
Central Experiment Station Board of Visitors. Past member of the
Adult Farm and Ranch Business Management Advisory Board. Raises
2,700 acres of cash grain, including spring wheat, barley,
canola and soybeans, near Barton, N.D. Mr. Fritels
principal occupation has been farming for the last five years or
longer.

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Robert Grabarski(1999): Previously chairman of
Wisconsin River Cooperative, Adams and Mauston, Wis., and first
vice chairman of Alto Cooperative Creamery, Waupun, Wis. Active
in many civic organizations, including the Adams Volunteer Fire
District. Graduate of the University of Wisconsin agriculture
industry short-course. Operates a 1,100-acre dairy and crop
farm, milking 100 registered Holsteins, near Arkdale, Wis.
Mr. Grabarskis principal occupation has been farming
for the last five years or longer.

Jerry Hasnedl(1995): Serves on boards for the
Minnesota Association of Cooperatives and Minnesota Barley
Growers. Chair of the former CHS Wheat Milling Defined Member
Board and was director for Northwest Grain. Raises wheat,
barley, corn, soybeans, canola, sunflowers and alfalfa near
St. Hilaire, Minn. Mr. Hasnedls principal
occupation has been farming for the last five years or longer.

Glen Keppy(1999):
Chairman of advisory committee for Clean Water Foundation and
executive committee of the U.S. Meat Export Federation. Has
been a director of the Iowa Pork Producers Association, National
Pork Producers Association and Federal Reserve Bank Ag
Committee. Graduate of University of WisconsinPlatteville
with a degree in technical agriculture. Operates a
farrow-to-finish hog farm and raises 1,000 acres of corn,
soybeans, oats and alfalfa near Davenport, Iowa.
Mr. Keppys principal occupation has been farming for
the last five years or longer.

James Kile, second vice chairman(1992): Served 18 years,
including 10 as chairman, on the board of St. John (Wash.)
Grange Supply. Represents CHS on the Washington State Council of
Farmer Cooperatives and Idaho Cooperative Council. Holds a
degree in agricultural economics from Washington State
University. Employed in banking before returning to
St. John to operate a dryland wheat and barley farm.
Mr. Kiles principal occupation has been farming for
the last five years or longer.

Randy Knecht(2001):
Director for eight years and current chairman of Four Seasons
Cooperative, Britton, S.D., chairman of Northern Electric
Cooperative board and director for Dakota Value Capture
Cooperative, Pierre, S.D. Holds a B.S. degree in agriculture
from South Dakota State University. Maintains a 450-head
cow-calf operation and raises 4,000 acres of corn,
soybeans, wheat and alfalfa near Houghton, S.D.
Mr. Knechts principal occupation has been farming for
the last five years or longer.

Michael Mulcahey(2003): Chairman of Southern Valley
Cooperative for eight years and current chairman of Crystal
Valley Co-op, Mankato, Minn. Former director for South Central
Federated Feeds. Raises 1,200 acres of corn and soybeans,
and finishes about 300 beef cattle near Waseca, Minn.
Mr. Mulcaheys principal occupation has been farming
for the last five years or longer.

Richard Owen(1999):
Serves on boards of Montana Council of Cooperatives, Mountain
View, LLC, and Cooperative Development Center. President of
Montana Cooperative Development Center, Inc. Former secretary
and president of Equity Co-op Association of Geraldine, Mont.,
and past secretary of Central Montana Cooperative of Geraldine
and Denton. Holds bachelors degree in agriculture from
Montana State University. Operates a grain farm near Geraldine.
Mr. Owenss principal occupation has been farming for
the last five years or longer.

Duane Stenzel(1993): Member of WFS, St. James,
Minn., and Wells (Minn.) Farmers Elevator, where he served as
board president and secretary. Previously chair of former CHS
Oilseed Processing and Refining Defined Member Board. Raises
710 acres of soybeans, sweet corn and corn near Wells.
Mr. Stenzels principal occupation has been farming
for the last five years or longer.

Michael Toelle, chairman(elected in 1992; chairman since
2002): Served 15 years as director of Country Partners
Cooperative, Browns Valley, Minn., including 10 years as
chairman. Holds a B.S. degree in industrial technology from
Moorhead State University. Operates a grain, hog and beef farm
near Browns Valley. Mr. Toelles principal occupation
has been farming for the last five years or longer.

Merlin Van Walleghen, secretary-treasurer(1993): Previously director of Farmers
Co-op Elevator Association of Mitchell, Letcher and Alexandria,
S.D., including 10 years as president. Served nine years on
the South Dakota Association of Cooperatives board, seven as
president. Member of Heartland Consumer Power District board,
former Butler Township supervisor, past board member of Farmers
Home

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Administration, and former advisory board member
for Mitchell Vocational Technical Institute. Operates a corn and
soybean farm near Letcher. Mr. Van Walleghens
principal occupation has been farming for the last five years or
longer.


Elections are for three-year terms and are open
to any eligible candidate. To be eligible, a candidate must meet
all of the following qualifications:



| |   |                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | At the time of the election, the individual must
    be less than the age of 68.                                                                                                                                                                                   
|
| |  | The individual must be a member of this
    cooperative or a member of a Cooperative Association Member.                                                                                                                                                           
|
| |  | The individual must reside in the region from
    which he or she is to be elected.                                                                                                                                                                                
|
| |  | The individual must be an active farmer or
    rancher. Active farmer or rancher means an
    individual whose primary occupation is that of a farmer or
    rancher, excluding any full-time employee of the Company or of a
    Cooperative Association Member.
|
| |  | The individual must currently be serving or shall
    have served at least one full term as a director of a
    Cooperative Association Member of this cooperative.                                                                                                

The following positions on the Board of Directors
will be elected at the 2004 Annual Meeting of Members:

|                                                                                   |  |                   |                | 
|---------------------------------------------------------------------------------- |  | ----------------- | -------------- | 
|Region                                                                             |  | Current Incumbent
|                                                                                   |  |                  
|Region 1 (Minnesota)                                                               |  |                   | Michael Toelle | 
|Region 3 (North Dakota)                                                            |  |                   | Dennis Carlson | 
|Region 4 (South Dakota)                                                            |  |                   | Randy Knecht   | 
|Region 5 (Connecticut, Indiana, Illinois,
    Kentucky, Michigan, Ohio, Wisconsin) |  |                   | Robert Bass    | 




EXECUTIVE OFFICERS

The table below lists the executive officers of
the Company as of August 31, 2004. Officers are appointed
annually by, the Board of Directors.

|                  |  |     |    |          |  |                                                                        
|----------------- |  | --- | -- | -------- |  | -----------------------------------------------------------------------
|Name              |  | Age |    | Position
|                  |  |     |    |         
|John D. Johnson   |  |     | 56 |          |  | President and Chief Executive Officer                                  
|Patrick Kluempke  |  |     | 56 |          |  | Executive Vice President  Corporate
    Planning and Administration   
|Thomas D. Larson  |  |     | 56 |          |  | Executive Vice President  Member and
    Public Affairs               
|Mark Palmquist    |  |     | 47 |          |  | Executive Vice President/Chief Operating
    Officer  Grains and Foods
|John Schmitz      |  |     | 54 |          |  | Executive Vice President and Chief Financial
    Officer               
|Leon E. Westbrock |  |     | 57 |          |  | Executive Vice President/Chief Operating
    Officer  Crop Inputs     

John D. Johnson,President and Chief Executive Officer, was born in Rhame, North
Dakota, and grew up in Spearfish, South Dakota. He earned a
degree in business administration and a minor in economics from
Black Hills State University. In 1976, he joined Harvest States
Cooperatives as a feed consultant in the GTA Feeds Division,
later becoming regional sales manager, Director of Sales and
Marketing and then General Manager of GTA Feeds. In 1992, he was
elected Group Vice President of Farm Marketing and Supply for
Harvest States Cooperatives and was selected President and CEO
in January 1995. Mr. Johnson became President and General
Manager of CHS Inc. upon its creation June 1,

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1998 and was named President and Chief Executive
Officer on June 1, 2000. Mr. Johnson serves on CF
Industries, Inc., as chairman and Gold Kist Inc. boards of
directors.


Patrick Kluempke,Executive Vice President of Corporate Planning and
Administration, was raised on a family dairy farm in central
Minnesota, and received a Bachelor of Science degree in Finance
and Accounting from St. Cloud University and the University
of Minnesota. Mr. Kluempke served in the United States Army
in South Vietnam and South Korea, as Aide to General J.
Guthrie. He began his agribusiness career in grain procurement
and merchandising at General Mills and later with Louis Dreyfus
Corporation in export marketing. Mr. Kluempke joined the
predecessor to CHS when G.T.A. merged with North Pacific Grain
Growers, in 1983, to form Harvest States Cooperatives and has
held various positions in the commodity marketing division and
at the corporate level. He was named to the position of Senior
Vice President of Corporate Planning and Business Development in
1993 and held that position until 2000 when he was named to his
current position. Mr. Kluempke serves on the board of
Ventura Foods, LLC.

Thomas D. Larsonis
Executive Vice President, Member and Public Affairs at CHS.
After growing up on a 480-acre crop and hog farm near Slayton,
Minnesota, he earned a Bachelors degree in Agriculture
Education from South Dakota State University. After working as a
vo-ag teacher, he took an agronomy sales position with Cenex,
Inc. and later managed the local cooperative at Hoffman,
Minnesota, for two years. Mr. Larson returned to the
regional cooperative in 1978 and held positions in marketing and
planning. He moved to agronomy in 1987 and became director of
agronomy services for Cenex/ Land OLakes Agronomy Company
in 1988. He was later named Vice President of agronomy services
until 1996 when he became Vice President of Cenex Supply and
Marketing, which included overseeing the operations of more than
two dozen Cenex-owned agricultural supply outlets.
Mr. Larson was named to his current position in January
1999. He oversees the public affairs area of the Company, which
includes communications, corporate giving, meetings and travel
and governmental affairs, including the Washington, D.C.
office. He is active in the FFA organization and is a recipient
of its Honorary American Degree.

Mark Palmquistis
the Executive Vice President and Chief Operating Officer of
Grains and Foods. He is responsible for all related areas of
grains including country operations, terminal operations,
exports, logistics, transportation and grain marketing joint
ventures. He is also responsible for the operations of wheat
milling, oilseed processing and refining, and food manufacturing
and packaging. Mr. Palmquist has worked for CHS for
25 years. Starting as a grain buyer and moving into
merchandising, he has traded many different commodities
including corn, soybeans and spring wheat. In 1990, he assumed
the role of Vice President and director of grain marketing and
then in 1993, was promoted to Senior Vice President, which he
held until 2000 when he was named to his current position.
Mr. Palmquist attended Gustavus Adolphus College in
St. Peter, Minnesota, graduating in 1979. He also attended
the Master of Business Administration program at the University
of Minnesota. Mr. Palmquist serves as a board of director
on Ventura Foods, LLC and National Cooperative Refinery
Association.

John Schmitzis the
Executive Vice President and Chief Financial Officer of the
Company. Mr. Schmitz joined Harvest States Cooperatives in
1974 as Corporate Accountant and has held a number of accounting
and finance positions within the Company, including divisional
controller positions in country services, farm
marketing & supply and grain marketing. In 1986, he was
named Vice President and Controller of Harvest States
Cooperatives, and had served in that position up to the time of
the merger with Cenex when he became Vice President, Finance, of
CHS. In May 1999, Mr. Schmitz became Senior Vice President
and Chief Financial Officer. Mr. Schmitz earned a Bachelor
of Science Degree in Accounting from St. Cloud State University,
and is a member of the American Institute of Certified Public
Accountants, the Minnesota Society of CPAs and the
National Society of Accountants for Cooperatives.
Mr. Schmitz serves on National Cooperative Refinery
Association, Ventura Foods, LLC, and Fin-Ag, Inc. boards of
directors.

Leon E. Westbrockis
the Executive Vice President and Chief Operating Officer of Crop
Inputs for the Company. He joined the cooperative system in 1976
and managed three local cooperatives before joining the regional
system. At the regional level, Mr. Westbrock served in the
merchandising department at Cenex, Inc. and then later as
Manager of the lubricants department and as director of
retailing. Since

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January 1, 1987, he served as Vice President
and Executive Vice President in the energy division of the
Company. On March 1, 2000 Mr. Westbrock was appointed
to his current position. He serves as chairman for both National
Cooperative Refinery Association and Universal Cooperatives,
Inc. boards of directors and also serves as a member of the
Agriliance, LLC board of directors. Mr. Westbrock received
a Bachelors Degree from St. Cloud State University and its
2004 College of Fine Arts and Humanities Leadership Award, and
served a tour in the U.S. Army.




Section 16(a) Beneficial Ownership
Reporting Compliance

Section 16(a) of the Securities Exchange Act
of 1934 requires the Companys executive officers and
directors and persons who beneficially own more than 10% of the
Companys 8% Cumulative Redeemable Preferred Stock to file
initial reports of ownership and reports of changes in ownership
with the Securities and Exchange Commission. Such executive
officers, directors and greater than 10% beneficial owners are
required by the regulations of the Commission to furnish the
Company with copies of all Section 16(a) reports they file.

Based solely upon a review of copies of reports
on Forms 3 and 4 and amendments thereto furnished to the
Company during, and reports on Form 5 and amendments
thereto furnished to the Company with respect to, the fiscal
year ended August 31, 2004, and based further upon written
representations received by the Company with respect to the need
to file reports on Form 5, the following persons filed late
reports required by Section 16(a) of the Exchange Act:
Mr. Kile was late in filing a report on Form 4
relating to a transaction in June 2004.



Code of Ethics

The Company has adopted a code of ethics within
the meaning of Item 406(b) of Regulation S-K of the
Securities and Exchange Commission. This code of ethics applies
to all officers and employees of the Company. The Company will
provide to any person, without charge, upon request, a copy of
such code of ethics. A person may request a copy by writing or
telephoning the Company at the following address:

CHS Inc.

Attention: Dave Kastelic


5500 Cenex Drive


Inver Grove Heights, Minnesota 55077


(651) 355-6000




Audit Committee Matters

The Companys Board of Directors has a
separately designated standing Audit Committee for the purpose
of overseeing the accounting and financial reporting processes
of the Company and audits of the Companys financial
statements. The Audit Committee is comprised solely of directors
Mr. Bass, Mr. Bielenberg and Mr. Carlson, each of
whom is an independent director. The Audit Committee has
oversight responsibility to the Companys owners relating
to the Companys financial statements and the financial
reporting process, preparation of the financial reports and
other financial information provided by the Company to any
governmental or regulatory body, the systems of internal
accounting and financial controls, the internal audit function
and the annual independent audit of the Companys financial
statements. The Audit Committee assures that the corporate
information gathering and reporting systems developed by
management represent a good faith attempt to provide senior
management and the Board of Directors with information regarding
material acts, events and conditions within the Company. In
addition, the Audit Committee is directly responsible for the
appointment, compensation and oversight of the independent
registered public auditors.

The Company does not believe that any member of
the Audit Committee of the Board of Directors is an audit
committee financial expert as defined in the
Sarbanes-Oxley Act of 2002 and rules and regulations thereunder.
As a cooperative, the Companys 17-member Board of
Directors is nominated and elected by the Companys
members. To ensure geographic representation of the
Companys members, the

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Board of Directors represent eight
(8) regions in which the Companys members are
located. The members in each region nominate and elect the
number of directors for that region as set forth in the
Companys bylaws. To be eligible for service as a director,
a nominee must (i) be an active farmer or rancher,
(ii) be a member of the Company and (iii) reside in
the geographic region from which he or she is nominated. Neither
management nor the incumbent directors have any control over the
nominating process for directors. Because of the nomination
procedure and the election process, the Company cannot ensure
that an elected director will be an audit committee
financial expert.


However, many of the Companys directors,
including all of the Audit Committee members, are financially
sophisticated and have experience or background in which they
have had significant financial oversight responsibilities. The
current Audit Committee includes directors who have served as
presidents or chairmen of local cooperative association boards.
Members of the Board of Directors, including the Audit
Committee, also operate large commercial enterprises requiring
expertise in all areas of management, including financial
oversight.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

Summary
Compensation.The following table sets
forth the cash and noncash compensation earned by the Chief
Executive Officer and each of the executive officers of the
Company whose total salary and bonus or similar incentive
payment earned during the year ended August 31, 2004,
exceeded $100,000 (the Named Executive Officers):

Summary Compensation Table

|                            |                                       |                     |         |              |  |           |         |                 |  |                 |         |            |  |   |        |        |  |   |       |        |  |   |         |  | 
|--------------------------- | ------------------------------------- | ------------------- | ------- | ------------ |  | --------- | ------- | --------------- |  | --------------- | ------- | ---------- |  | - | ------ | ------ |  | - | ----- | ------ |  | - | ------- |  | 
|                            |                                       |                     |         | Long-Term   
|                            |                                       | Annual Compensation |         | Compensation
|                            |                                       |                     |         |             
|                            |                                       |                     |         | Other Annual |  | All Other |         | LTIP           
|Name and Principal Position |                                       | Year Ended          |         | Salary(1)    |  | Bonus(1)  |         | Compensation(2) |  | Compensation(3) |         | Payouts(1)
|                            |                                       |                     |         |              |  |           |         |                 |  |                 |         |           
|John. D. Johnson            |                                       |                     | 8/31/04 |              |  | $         | 850,000 |                 |  | $               | 800,530 |            |  | $ | 25,800 |        |  | $ | 8,526 |        |  | $ | 969,646 | 
|                            | President and                         |                     |         | 8/31/03      |  |           |         | 850,000         |  |                 |         | 710,940    |  |   |        | 25,800 |  |   |       | 7,931  |  |   |         |  | 
|                            | Chief Executive Officer               |                     |         | 8/31/02      |  |           |         | 820,000         |  |                 |         | 811,750    |  |   |        | 30,376 |  |   |       | 10,216 |  |   |         |  | 
|Patrick Kluempke            |                                       |                     | 8/31/04 |              |  |           | 287,600 |                 |  |                 | 212,680 |            |  |   | 15,120 |        |  |   | 9,884 |        |  |   | 211,562 | 
|                            | Executive Vice President             |                     |         | 8/31/03      |  |           |         | 230,880         |  |                 |         | 145,842    |  |   |        | 15,120 |  |   |       | 7,549  |  |   |         |  | 
|                            | Corporate Planning and Administration |                     |         | 8/31/02      |  |           |         | 223,000         |  |                 |         | 166,875    |  |   |        | 15,120 |  |   |       | 10,873 |  |   |         |  | 
|Thomas D. Larson            |                                       |                     | 8/31/04 |              |  |           | 253,400 |                 |  |                 | 185,489 |            |  |   | 15,120 |        |  |   | 9,018 |        |  |   | 208,647 | 
|                            | Executive Vice President             |                     |         | 8/31/03      |  |           |         | 240,000         |  |                 |         | 156,966    |  |   |        | 15,120 |  |   |       | 6,104  |  |   |         |  | 
|                            | Member and Public Affairs             |                     |         | 8/31/02      |  |           |         | 229,100         |  |                 |         | 172,200    |  |   |        | 18,878 |  |   |       | 10,214 |  |   |         |  | 
|Mark Palmquist              |                                       |                     | 8/31/04 |              |  |           | 490,000 |                 |  |                 | 342,143 |            |  |   | 15,120 |        |  |   | 9,250 |        |  |   | 412,301 | 
|                            | Executive Vice President              |                     |         | 8/31/03      |  |           |         | 482,400         |  |                 |         | 145,323    |  |   |        | 15,120 |  |   |       | 6,938  |  |   |         |  | 
|                            | and Chief Operating Officer          |                     |         | 8/31/02      |  |           |         | 453,400         |  |                 |         | 342,000    |  |   |        | 15,120 |  |   |       | 11,081 |  |   |         |  | 
|                            | Grains and Foods                      |                     |         |              |  |           |         |                 |  |                 |         |            |  |   |        |        |  |   |       |        |  |   |         |  | 
|John Schmitz                |                                       |                     | 8/31/04 |              |  |           | 450,000 |                 |  |                 | 332,775 |            |  |   | 15,120 |        |  |   | 9,250 |        |  |   | 366,907 | 
|                            | Executive Vice President and          |                     |         | 8/31/03      |  |           |         | 410,700         |  |                 |         | 268,146    |  |   |        | 15,120 |  |   |       | 7,932  |  |   |         |  | 
|                            | Chief Financial Officer               |                     |         | 8/31/02      |  |           |         | 317,300         |  |                 |         | 244,500    |  |   |        | 21,856 |  |   |       | 12,255 |  |   |         |  | 
|Leon E. Westbrock           |                                       |                     | 8/31/04 |              |  |           | 490,000 |                 |  |                 | 359,783 |            |  |   | 15,120 |        |  |   | 9,250 |        |  |   | 412,301 | 
|                            | Executive Vice President              |                     |         | 8/31/03      |  |           |         | 482,400         |  |                 |         | 344,148    |  |   |        | 15,120 |  |   |       | 6,725  |  |   |         |  | 
|                            | and Chief Operating Officer          |                     |         | 8/31/02      |  |           |         | 453,400         |  |                 |         | 342,000    |  |   |        | 15,120 |  |   |       | 12,057 |  |   |         |  | 
|                            | Crop Inputs                           |                     |         |              |  |           |         |                 |  |                 |         |            |  |   |        |        |  |   |       |        |  |   |         |  | 



---



|    |                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes amounts of salary and bonus deferred
    pursuant to deferred compensation plans.                                                                                    
|   
|(2) | Amounts shown include personal use of a Company
    vehicle or vehicle allowance.                                                                                             
|   
|(3) | Other compensation includes the Companys
    matching contributions under the Companys 401(k) Plan and
    the portion of long-term disability premiums paid by the Company.

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Report on Executive Compensation

The Corporate Responsibility Committee of the
Board of Directors, subject to the approval of the Board of
Directors, makes recommendations for the compensation of the CHS
Inc. chief executive officer and oversees the administration of
the executive compensation programs.



| |                                                 
| | ------------------------------------------------
| | Executive Compensation Policies and
    Programs

CHS Inc. executive compensation programs are
designed to attract and retain highly qualified executives and
to motivate them to optimize member owner returns by achieving
aggressive goals. The compensation program links executive
compensation directly to the Companys performance. A
significant portion of each executives compensation is
dependent upon value-added operations and meeting financial
goals and other individual performance objectives.

Each year, the Committee reviews the executive
compensation policies with respect to the correlation between
executive compensation and the creation of member owner value,
as well as the competitiveness of the programs. The Committee
determines what, if any, changes are appropriate to executive
compensation programs of CHS Inc. The Committee recommends to
the total Board of Directors, salary actions relative to the
chief executive officer and determines the amount of annual
variable pay and the amount of long-term variable pay awards.

The Company intends to the extent possible, to
preserve the deductibility under the Internal Revenue Code of
compensation paid to its executive officers while maintaining
compensation programs to attract and retain highly qualified
executives in a competitive environment. Accordingly,
compensation paid under CHS Inc. share option and incentive
compensation plans is generally deductible.



| |                           
| | --------------------------
| | Components of Compensation

There are three basic components to the CHS Inc.
executive compensation plan: base pay; annual variable pay; and
long-term variable pay (grants in the share option plan). Each
component is designed to be competitive within the executive
compensation market. In determining competitive compensation
levels, the Company analyzes information from several
independent compensation surveys, which include information
regarding a comparable all-industrial market and other companies
that compete for executive talent.

Base Pay:Base pay
is designed to be competitive at the 50th percentile of other
large companies for equivalent positions. The executives
actual salary relative to this competitive benchmark varies
based on individual performance and the individuals
skills, experience and background.

Annual Variable Pay:Award levels, like the base pay levels, are set with reference
to competitive conditions and are intended to motivate the
executives by providing substantial incentive payments for the
achievement of aggressive goals. The actual amounts paid for
2004 were determined based on two factors: first, profitability
and financial performance of the Company and the
executives business unit; and second, the individual
executives performance against other specific management
objectives such as revenue volume growth, value added
performance or talent development. Financial objectives are
given greater weight than individual performance objectives in
determining individual awards. The types and relative importance
of specific financial and other business objectives varied among
executives depending upon their positions and the particular
business unit for which they were responsible.

Long-Term Variable
Pay:The main purpose of the long-term
variable pay program is to encourage the CHS Inc. executives to
increase the value of doing business with the Company by
increasing and improving value-added business opportunities and
therefore the value of member owners doing business with CHS
Inc. The long-term variable pay component of the compensation
program (through extended vesting) is also designed to create an
incentive for the individual to remain with the Company.

The long-term variable pay program consists of
grants of options for shares in the private investment companies
sponsored by CHS Inc. These options vest over a multi-year
period. The Company periodically

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grants new awards to provide continuing
incentives for future performance. Like the annual variable pay,
award levels are set with regard to competitive considerations
and each individuals actual award is based on financial
performance of the Company, collectively.




| |                                                
| | -----------------------------------------------
| | Compensation of the Chief Executive
    Officer

In determining the compensation of the chief
executive officer, the Committee considers three factors: the
absolute and relative performance of the business particularly
as it relates to variable pay; the market for such positions;
and CHS Inc. compensation strategy in determining the mix of
base, annual, and long-term variable pay.

In general, the Companys strategy is to
distribute pay for the chief executive officer among the three
basic components so that it effectively reflects the competitive
market with major consideration for achievement of individual
performance objectives.

Mr. Johnsons actual base salary for
fiscal year 2004 was $850,000. Based on CHS Inc. financial
performance in terms of profitability and other individual goals
related to achieving communications objectives, business partner
accountability and other strategic objectives, Mr. Johnson
received an annual variable pay award of $800,530 and will
receive a long-term variable pay award of $969,646 for fiscal
year 2004. These incentive payments were consistent with his
achievement of performance standards set by the Board of
Directors.

Corporate Responsibility Committee Members,

|               |  |                     
|-------------- |  | --------------------
|Robert Elliott |  | Michael Mulcahey    
|Richard Owen   |  | Merlin Van Walleghen

The following summarizes certain benefits in
effect as of August 31, 2004 to the Named Executive
Officers.



| |                                              
| | ---------------------------------------------
| | Employment Agreement with John D.
    Johnson

The Companys executive officers are
employed on an at-will basis and, except as provided below, none
of the Companys executive officers has a written
employment agreement. On November 6, 2003, the Company
entered into an employment agreement with John D. Johnson, the
President and Chief Executive Officer. The employment agreement
provides for a rolling three-year period of employment effective
September 1, 2003 at an initial base salary of at least
$850,000, subject to annual review. Either party, subject to the
rights and obligations set forth in the employment agreement,
may terminate Mr. Johnsons employment at any time.
The Company is obligated to pay Mr. Johnson a severance
allowance of 2.99 times his base salary and target bonus in the
event Mr. Johnsons employment is terminated for any
reason other than for cause (as such term is defined in the
employment agreement), death, disability or voluntary
termination, and in the event of the consolidation of the
Companys business with the business of any other entity,
if Mr. Johnson is not offered the position of Chief
Executive Officer of the combined entity. The contract provides
for a gross-up for any possible excise tax. Mr. Johnson has
also agreed to a non-compete clause of two years, in the event
of his termination.



| |                                              
| | ---------------------------------------------
| | Management Compensation Incentive
    Program

Each Named Executive Officer is eligible to
participate in the Management Compensation Incentive Program
(the Incentive Program) for the year ending
August 31, 2004. The Incentive Program is based on Company,
group or division performance and individual performance. These
amounts will be paid after August 31, 2004. The target
incentive is 50% of base compensation except for the President
and Chief Executive Officer, where target incentive is 67% of
base compensation.

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| |                         
| | ------------------------
| | Long-Term Incentive Plan

Each Named Executive Officer is eligible to
participate in the LongTerm Incentive Plan. The plan
consists of a three-year performance period. Award opportunities
are expressed as a percentage of a participating employees
position average mid-point. Company performance must meet a
minimum level of pre-tax earnings per unit of sales volume and
net income levels before any grants are made from this plan. The
Board of Directors has discretion to increase or decrease an
award up to 20%. Awards from the plan are grants to the
Companys Share Option Plan at the end of each plan period.
For each of the fiscal years ended August 31, 2004 and
2003, the Board of Directors increased the awards by an
additional 10%.

Long-Term Incentive Plans  Awards
in Last Fiscal Year

|                            |                                                                                |           |         |            |  |           |           |           |  |           |        |  |  |   |         |  |  |   |         |  | 
|--------------------------- | ------------------------------------------------------------------------------ | --------- | ------- | ---------- |  | --------- | --------- | --------- |  | --------- | ------ |  |  | - | ------- |  |  | - | ------- |  | 
|                            |                                                                                | Award     |         | Maturation |  | Threshold |           | Target    |  | Maximum  
|Name and Principal Position |                                                                                | 2002-2004 |         | of Award   |  | Each Year |           | Each Year |  | Each Year
|                            |                                                                                |           |         |            |  |           |           |           |  |          
|John D. Johnson             |                                                                                | $         | 969,646 |            |  |           | 2002-2004 |           |  | $         | 84,000 |  |  | $ | 562,800 |  |  | $ | 840,000 | 
|                            | President and Chief Executive Officer                                          |           |         |            |  |           |           |           |  |           |        |  |  |   |         |  |  |   |         |  | 
|Patrick Kluempke            |                                                                                |           | 211,562 |            |  |           | 2002-2004 |           |  |           | 18,328 |  |  |   | 122,794 |  |  |   | 183,275 | 
|                            | Executive Vice President  Corporate
    Planning and Administration           |           |         |            |  |           |           |           |  |           |        |  |  |   |         |  |  |   |         |  | 
|Thomas D. Larson            |                                                                                |           | 208,647 |            |  |           | 2002-2004 |           |  |           | 18,075 |  |  |   | 121,103 |  |  |   | 180,750 | 
|                            | Executive Vice President  Member and
    Public Affairs                       |           |         |            |  |           |           |           |  |           |        |  |  |   |         |  |  |   |         |  | 
|Mark Palmquist              |                                                                                |           | 412,301 |            |  |           | 2002-2004 |           |  |           | 35,718 |  |  |   | 239,307 |  |  |   | 357,175 | 
|                            | Executive Vice President and Chief Operating
    Officer 
    Grain and Foods |           |         |            |  |           |           |           |  |           |        |  |  |   |         |  |  |   |         |  | 
|John Schmitz                |                                                                                |           | 366,907 |            |  |           | 2002-2004 |           |  |           | 31,785 |  |  |   | 212,960 |  |  |   | 317,850 | 
|                            | Executive Vice President and Chief Financial
    Officer                       |           |         |            |  |           |           |           |  |           |        |  |  |   |         |  |  |   |         |  | 
|Leon E. Westbrock           |                                                                                |           | 412,301 |            |  |           | 2002-2004 |           |  |           | 35,718 |  |  |   | 239,307 |  |  |   | 357,175 | 
|                            | Executive Vice President and Chief Operating
    Officer 
    Crop Inputs     |           |         |            |  |           |           |           |  |           |        |  |  |   |         |  |  |   |         |  | 



| |                
| | ---------------
| | Retirement Plan

Each of the Named Executive Officers is entitled
to receive benefits under the Companys Cash Balance
Retirement Plan (the Retirement Plan). An
employees benefit under the Retirement Plan depends on
credits to the employees account, which are based on the
employees total salary each year the employee works for
the Company, the length of service with the Company and the rate
of interest credited to the employees account balance each
year. Credits are made to the employees account from Pay
Credits, Special Career Credits and Investment Credits.

The amount of Pay Credits added to an
employees account each year is a percentage of the
employees gross salary, including overtime pay,
commissions, severance pay, bonuses, any compensation reduction
pursuant to the 401(k) Plan and any pretax contribution to any
of the Companys welfare benefit plans, paid vacations,
paid leaves of absence and pay received if away from work due to
a sickness or injury. The Pay Credits percentage received is
determined on a yearly basis, based on the years of Benefit
Service completed as of January 1 of each year. An employee
receives one year of Benefit Service for every calendar year of
employment in which the employee completed at least
1,000 hours of service.

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Effective January 1, 2004, Pay Credits are
earned according to the following schedule:

|                         |  |                           |   |                           |  |  |    |  
|------------------------ |  | ------------------------- | - | ------------------------- |  |  | -- | -
|                         |  | Pay Below Social Security |   | Pay Above Social Security
|Years of Benefit Service |  | Taxable Wage Base         |   | Taxable Wage Base        
|                         |  |                           |   |                          
|1 to 3 years             |  |                           | 3 | %                         |  |  | 6  | %
|4 to 7 years             |  |                           | 4 | %                         |  |  | 8  | %
|8 to 11 years            |  |                           | 5 | %                         |  |  | 10 | %
|12 to 15 years           |  |                           | 6 | %                         |  |  | 12 | %
|16 years and more        |  |                           | 7 | %                         |  |  | 14 | %

The Company credits an employees account at
the end of the year with an Investment Credit based on the
balance at the beginning of the year. The Investment Credit is
based on the average return for one-year U.S. Treasury
Bills for the preceding 12-month period. The maximum Investment
Credit will not exceed 12% for any year.

As of December 31, 2003, the dollar value of
the account and years of service for each of the Named Executive
Officers was:

|                  |  |              |           |                  |  |  |    | 
|----------------- |  | ------------ | --------- | ---------------- |  |  | -- | 
|                  |  | Dollar Value |           | Years of Service
|                  |  |              |           |                 
|John D. Johnson   |  | $            | 1,013,550 |                  |  |  | 28 | 
|Patrick Kluempke  |  |              | 496,367   |                  |  |  | 21 | 
|Thomas D. Larson  |  |              | 493,751   |                  |  |  | 27 | 
|Mark Palmquist    |  |              | 544,953   |                  |  |  | 24 | 
|John Schmitz      |  |              | 475,773   |                  |  |  | 29 | 
|Leon E. Westbrock |  |              | 1,078,650 |                  |  |  | 23 | 

In addition, each of the Named Executive Officers
may participate in the Companys Deferred Compensation
Supplemental Retirement Plan (the Supplemental Plan).
Participants in the Supplemental Plan are select management or
highly compensated employees of the Company who have been
designated as eligible by the President of the Company to
participate in such plan. Compensation waived under the Share
Option Plan is not eligible for Pay Credits under the Cash
Balance Retirement Plan or matching contributions under the
401(k) Plan. The Supplemental Plan is intended to replace the
benefits lost under those plans due to Section 415 of the
Internal Revenue Code of 1986, as amended (the Code) which
cannot be considered for purposes of benefits due to
Section 401(a)(17) of the Code under the qualified plans
that the Company offers. Some of the Supplemental Plan benefits
are funded by a rabbi trust, with a balance at August 31,
2004 of $7.1 million. No further contributions are being
made to the trust and the Supplemental Plan is not being funded
and does not qualify for special tax treatment under the Code.

Finally, the President and Chief Executive
Officer of the Company is eligible to participate in the
Companys Special Supplemental Executive Retirement Plan
(the Special Supplemental Plan). The special supplemental
retirement benefit will be credited at the end of each plan year
for which the participant completes a year of service. The
amount credited shall be an amount equal to that set forth in a
schedule of benefits stated in the Special Supplemental Plan.
The Special Supplemental Plan is not funded or qualified for
special tax treatment under the Code.

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As of December 31, 2003, the dollar value of
the accounts of each of the Named Executive Officers was
approximately:

|                  |  |                   |           |                   |  |   |     | 
|----------------- |  | ----------------- | --------- | ----------------- |  | - | --- | 
|                  |  |                   |           | Special          
|                  |  | Supplemental Plan |           | Supplemental Plan
|                  |  |                   |           |                  
|John D. Johnson   |  | $                 | 2,575,684 |                   |  | $ | 0   | 
|Patrick Kluempke  |  |                   | 151,037   |                   |  |   | N/A | 
|Thomas D. Larson  |  |                   | 624,081   |                   |  |   | N/A | 
|Mark Palmquist    |  |                   | 370,892   |                   |  |   | N/A | 
|John Schmitz      |  |                   | 327,616   |                   |  |   | N/A | 
|Leon E. Westbrock |  |                   | 1,723,713 |                   |  |   | N/A | 



| |            
| | -----------
| | 401(k) Plan

Each Named Executive Officer is eligible to
participate in the CHS Inc. Savings Plan (the 401(k) Plan). All
benefit-eligible employees of the Company are eligible to
participate in the 401(k) Plan. Effective January 1, 2002,
participants may contribute between 1% and 50% (not to exceed
the IRS limits on benefits in the case of highly
compensated employees) of their pay on a pretax basis.
Each of the Named Executive Officers is a highly
compensated employee. The Company matches 50% of the first
6% of pay contributed each year. The Companys Board of
Directors may elect to reduce or eliminate matching
contributions for any year or any portion thereof. Participants
are 100% vested in their own contributions and are fully vested
after three years of service in any Company matching
contribution made on the participants behalf.



| |                                             
| | --------------------------------------------
| | Nonqualified Deferred Compensation
    Plans

In October 1997, the Company adopted a plan
entitled the Share Option Plan. Participants in the Share Option
Plan include directors, officers and other employees who have
been designated as provided in the Share Option Plan. The Share
Option Plan provides for the grant of options both as awards and
in exchange for future compensation. Electing to receive an
option in exchange for future compensation has the effect of
deferring receipt of that amount of base salary or annual
variable pay. With respect to options granted as awards, the
Company has made all awards under its Long-Term Incentive Plan,
described above, in the form of options under the Share Option
Plan or deferred compensation plan. With respect to options
granted in exchange for future compensation, a participant may
elect to exchange up to 30% of his or her base salary and up to
100% of his or her annual variable compensation for options;
this must be done prior to the beginning of the fiscal year in
which the compensation will be earned. Options for foregone
salary amounts are issued quarterly on or about March 31,
June 30, September 30 and December 31; options
for foregone annual and long-term variable compensation payments
are issued as soon as practicable following determination of the
relevant amount. If a participants employment with the
Company terminates prior to the grant of an option to be issued
in exchange for foregone compensation that has been earned, the
amount of the compensation is paid to the participant in cash.
During the fiscal year ended August 31, 2004, all of the
Named Executive Officers participated in the non-elective
deferral and all of the Named Executive Officers (except
Mr. Larson) participated in the elective deferral to the
Share Option Plan.

Each option granted under the Share Option Plan
has an exercise price equal to 25% of the amount of the award or
the exchanged future compensation. Each option derives its value
from the performance of one or more deemed investment
alternatives selected by the recipient at the time of grant. The
current investment options are investments in four private
investment companies with different degrees of risk that are
owned by the Company and managed for it by a third party
investment manager. When a participant exercises an option, the
Company pays the participant the amount that the participant
would have received if the participant had made an investment in
the selected investment on the option grant date in an amount
equal to 125% of the amount of the award or exchanged future
compensation, reinvested all dividends and other distributions
on that investment from the grant date to the exercise date and
then sold

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that investment on the exercise date. Options
issued in exchange for foregone compensation become exercisable
six months after the date of grant.


Each time an option is granted under the Share
Option Plan, the Company contributes an amount sufficient to
purchase the investment or investments selected by the optionee
in the relevant private investment company or companies. The
Companys obligations with respect to options granted under
the Share Option Plan are unsecured obligations of the Company
that rank equally with its other unsecured and unsubordinated
obligations.



| |                                   
| | ----------------------------------
| | Change of Control
    Arrangements

The Share Option Plan provides that in the event
of a change of control:



| |   |                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | even if an optionees option agreement
    provides that the optionee must remain in the employ of the
    Company for six months from the grant date, that requirement
    will no longer apply;                                                                               
|
| |  | the exercise period for an option held by an
    employee whose employment (or a director whose service as a
    director) has terminated other than involuntarily for cause will
    not end prior to six months after the change of control;                                  
|
| |  | the committee in charge of the Share Option Plan
    will not be able to amend options without the consent of the
    optionees other than as is necessary or advisable in connection
    with compliance with or any addition to or change in applicable
    laws; and         
|
| |  | the Company may terminate options on any date
    after the change of control if the committee in charge of the
    Share Option Plan makes a cash payment equal to the payment that
    the participant would receive if the participant exercised the
    option on that date.

For purposes of the Share Option Plan,
change of control means, except as otherwise
provided in a written agreement executed by the participant and
the Company prior to the change of control, any change in:



| |   |                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------
| |  | the ownership of the Company;                                                                                                           
|
| |  | the effective control of the Company, as defined
    in section 280G of the Internal Revenue Code; or                                   
|
| |  | the ownership of a substantial portion of the
    assets of the Company, as defined under section 280G of the
    Internal Revenue Code.

In addition, the Companys employment
agreement with John D. Johnson contains provisions that may be
triggered in the case of a consolidation of the Companys
business with the business of another entity. See
Employment Agreement with John D. Johnson above.



| |                        
| | -----------------------
| | Directors Compensation

The Board of Directors met monthly during the
year ended August 31, 2004. Through August 31, 2004,
the Company provided each director with compensation of $42,000,
paid in twelve monthly payments, with; the Chairman of the Board
receiving an additional annual compensation of $12,000, the
First Vice Chairman receiving an additional annual compensation
of $3,600, and the Secretary-Treasurer receiving an additional
annual compensation of $1,800. Each director receives a per diem
of $300 plus actual expenses and travel allowance for each day
spent on Company meetings (other than regular Board meetings and
the Annual Meeting), life insurance and health and dental
insurance. Each director has a retirement benefit of
$175 per month per year of service, with a maximum benefit
of $2,625 per month, for life with a guarantee of
120 months (paid to beneficiary in the event of death).
This benefit commences at age 60, or retirement, whichever
is later. This retirement benefit may be converted to a lump
sum. Some of the retirement benefits are funded by a rabbi
trust, with a balance at August 31, 2004 of
$0.9 million. The retired directors may also continue
health benefits until eligible for Medicare and thereafter pay
at their own expense for a Medicare supplemental policy.

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Directors are eligible to participate in the
Share Option Plan described above under
 Nonqualified Deferred Compensation
Plans. Each participating director may elect to exchange
up to 100% of his or her monthly director fee; this must be done
prior to the beginning of the fiscal year in which the fees will
be earned. Electing to receive an option in exchange for future
fees has the effect of deferring receipt of the amount of the
fees exchanged.



| |                                         
| | ----------------------------------------
| | Committees of the Board of
    Directors

The Board of Directors appoints ad hoc committees
from time to time to review certain matters and make reports and
recommendations to the full Board of Directors for action. The
entire Board of Directors determines the salaries and incentive
compensation for the President and Chief Executive Officer using
industry and compensation studies. The Board of Directors has a
standing Audit Committee to review the results and scope of the
annual audit and other services provided by the Companys
independent auditors, and another standing committee to review
the equity redemption policy and its application to situations
believed by the equity holder or patrons equity department
to be unusual.



| |                                                                
| | ---------------------------------------------------------------
| | Compensation Committee Interlocks and
    Insider Participation

As noted above, the Companys Board of
Directors does not have a Compensation Committee. The entire
Board of Directors determined the compensation of the President
and Chief Executive Officer and the terms of the employment
agreement with the President and Chief Executive Officer. The
President and Chief Executive Officer determines the
compensation for all other executive officers.

None of the directors are officers of the
Company. See Item 13 for directors that were a party to
related transactions.






|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

Beneficial ownership of equity securities as of
August 31, 2004 is shown below:

|                                         |  |                          |  |            |               |            |  |  |   | 
|---------------------------------------- |  | ------------------------ |  | ---------- | ------------- | ---------- |  |  | - | 
|                                         |  |                          |  | Amount and |               |           
|                                         |  |                          |  | Nature of  |               |           
|                                         |  |                          |  | Beneficial |               |           
|Title of Class                           |  | Name of Beneficial Owner |  | Ownership  |               | % of Class
|                                         |  |                          |  |            |               |           
|8% Cumulative Redeemable Preferred Stock |  | Directors:               |  |            |               |            |  |  |   | 
|                                         |  | Michael Toelle           |  |            | 420  shares   | (1)        |  |  | * | 
|                                         |  | Bruce Anderson           |  |            | 40 shares     |            |  |  | * | 
|                                         |  | Robert Bass              |  |            | 120 shares    |            |  |  | * | 
|                                         |  | David Bielenberg         |  |            | 1,400 shares  |            |  |  | * | 
|                                         |  | Dennis Carlson           |  |            | 460  shares   | (1)        |  |  | * | 
|                                         |  | Curt Eischens            |  |            | 120 shares    |            |  |  | * | 
|                                         |  | Robert Elliott           |  |            | 640 shares    |            |  |  | * | 
|                                         |  | Steve Fritel             |  |            | 880 shares    |            |  |  | * | 
|                                         |  | Robert Grabarski         |  |            | 2,280  shares | (1)        |  |  | * | 
|                                         |  | Jerry Hasnedl            |  |            | 200 shares    |            |  |  | * | 
|                                         |  | Glen Keppy               |  |            | 200 shares    |            |  |  | * | 
|                                         |  | James Kile               |  |            | 250  shares   | (1)        |  |  | * | 
|                                         |  | Randy Knecht             |  |            | 313  shares   | (1)        |  |  | * | 
|                                         |  | Michael Mulcahey         |  |            | 0 shares      |            |  |  | * | 
|                                         |  | Richard Owen             |  |            | 240 shares    |            |  |  | * | 

62



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##### Table of Contents



|               |  |                                                  |  |            |                |            |  |  |   | 
|-------------- |  | ------------------------------------------------ |  | ---------- | -------------- | ---------- |  |  | - | 
|               |  |                                                  |  | Amount and |                |           
|               |  |                                                  |  | Nature of  |                |           
|               |  |                                                  |  | Beneficial |                |           
|Title of Class |  | Name of Beneficial Owner                         |  | Ownership  |                | % of Class
|               |  |                                                  |  |            |                |           
|               |  | Duane Stenzel                                    |  |            | 200 shares     |            |  |  | * | 
|               |  | Merlin Van Walleghen                             |  |            | 1,600 shares   |            |  |  | * | 
|               |  | Named Executive Officers:                        |  |            |                |            |  |  |   | 
|               |  | John D. Johnson                                  |  |            | 3,400 shares   |            |  |  | * | 
|               |  | Patrick Kluempke                                 |  |            | 1,000 shares   |            |  |  | * | 
|               |  | Thomas D. Larson                                 |  |            | 400 shares     |            |  |  | * | 
|               |  | Mark Palmquist                                   |  |            | 1,200 shares   |            |  |  | * | 
|               |  | John Schmitz                                     |  |            | 1,400 shares   |            |  |  | * | 
|               |  | Leon E. Westbrock                                |  |            | 800 shares     |            |  |  | * | 
|               |  |                                                  |  |            |                |            |  |  |   | 
|               |  | Directors and executive
    officers  as a group |  |            | 17,563  shares |            |  |  | * | 



---



|    |                                                                                       
|--- | --------------------------------------------------------------------------------------
|(1) | Includes shares held by spouse, children and
    Individual Retirement Accounts (IRA).



| |   |              
| | - | -------------
| | * | Less than 1%.

The Company has no compensation plans under which
equity securities of the Company are authorized for issuance.

To the Companys knowledge there is no
person who owns beneficially more than 5% of the 8% Cumulative
Redeemable Preferred Stock.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

Because directors must be active patrons of the
Company or an affiliated association, transactions between the
Company and directors are customary and expected. Transactions
include the sales of commodities to the Company and the
purchases of products and services from the Company, as well as
patronage refunds and equity redemptions received from the
Company. During the period indicated, the value of those
transactions between a particular director (and members of such
directors immediate family, which includes such
directors spouse; parents; children; siblings; mothers and
fathers-in-law; sons and daughters-in-law; and brothers and
sisters-in-law) and the Company in which the amount involved
exceeded $60,000 are shown below.

|                     |  |                 |         | 
|-------------------- |  | --------------- | ------- | 
|                     |  | Year Ended     
|Name                 |  | August 31, 2004
|                     |  |                
|Bruce Anderson       |  | $               | 127,480 | 
|Curt Eischens        |  |                 | 209,601 | 
|Jerry Hasnedl        |  |                 | 553,598 | 
|Glen Keppy           |  |                 | 109,654 | 
|Michael Mulcahey     |  |                 | 119,578 | 
|Michael Toelle       |  |                 | 459,829 | 
|Merlin Van Walleghen |  |                 | 313,209 | 

63



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##### Table of Contents






PART IV.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

The following table shows the aggregate fees
billed to the Company by PricewaterhouseCoopers for services
rendered during the fiscal years ended August 31, 2004
and 2003:

|                        |       |      |         |           |  |   |         |           | 
|----------------------- | ----- | ---- | ------- | --------- |  | - | ------- | --------- | 
|Description of Fees     |       | 2004 |         | 2003     
|                        |       |      |         |          
|Audit Fees(1)           |       | $    | 904,128 |           |  | $ | 834,707 |          
|Audit  Related Fees(2) |       |      | 99,717  |           |  |   | 70,754  |          
|Tax Fees(3)             |       |      | 705,151 |           |  |   | 138,109 |          
|All Other Fees          |       |      |         |           |  |   |         |          
|                        |       |      |         |           |  |   |         |          
|                        | Total |      | $       | 1,708,996 |  |   | $       | 1,043,570 | 
|                        |       |      |         |           |  |   |         |          



---



|    |                                                                                                                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes fees for audit of annual financial
    statements and reviews of the related quarterly financial
    statements, certain statutory audits, work related to S-2
    filings and assistance with preparation and review of documents
    filed with the Securities and Exchange Commission.
|   
|(2) | Includes fees for employee benefit plan audits.                                                                                                                                                                                                                                                   
|   
|(3) | Includes fees related to tax compliance, tax
    advice and tax planning.                                                                                                                                                                                                                         

In accordance with the CHS Inc. Audit Committee
Charter, on October 4, 2004, the Audit Committee adopted
the following policies and procedures for the approval of the
engagement of an independent auditor for audit, review or attest
services and for pre-approval of certain permissible non-audit
services, all to ensure auditor independence.

The Companys independent auditor will
provide audit, review and attest services only at the direction
of, and pursuant to engagement fees and terms approved by, the
Audit Committee. The audit committee approves, in advance, all
non-audit services to be performed by the independent auditors
and the fees and compensation to be paid to the independent
auditors. The Audit Committee approved all of the services
listed above in advance.

64



---



##### Table of Contents








|         |                                      
|-------- | -------------------------------------
|Item 15. | Exhibits and Financial
    Statements

(a)(1) Financial Statements

The following financial statements and the
Reports of Independent Registered Public Accounting Firms are
filed as part of this Form 10-K.

|                                                                                                                        |  |          |      | 
|----------------------------------------------------------------------------------------------------------------------- |  | -------- | ---- | 
|                                                                                                                        |  | Page No.
|                                                                                                                        |  |         
|CHS Inc.                                                                                                                |  |          |      | 
|Consolidated Balance Sheets as of August 31,
    2004 and 2003                                                          |  |          | F-1  | 
|Consolidated Statements of Operations for the
    years ended August 31, 2004, 2003 and 2002                            |  |          | F-2  | 
|Consolidated Statements of Equities and
    Comprehensive Income for the years ended August 31, 2004,
    2003 and 2002 |  |          | F-3  | 
|Consolidated Statements of Cash Flows for the
    years ended August 31, 2004, 2003 and 2002                            |  |          | F-4  | 
|Notes to Consolidated Financial Statements                                                                              |  |          | F-5  | 
|Report of Independent Registered Public
    Accounting Firm                                                             |  |          | F-31 | 
|VENTURA FOODS, LLC, a non-consolidated 50%
    owned equity investment                                                  |  |          |      | 
|Independent Auditors Report                                                                                            |  |          | F-32 | 
|Consolidated Balance Sheets as of March 31,
    2004 and 2003                                                           |  |          | F-33 | 
|Consolidated Statements of Income for the years
    ended March 31, 2004, 2003 and 2002                                 |  |          | F-34 | 
|Consolidated Statements of Members Capital
    for the years ended March 31, 2004, 2003 and 2002                       |  |          | F-35 | 
|Consolidated Statements of Cash Flows for the
    years ended March 31, 2004, 2003 and 2002                             |  |          | F-36 | 
|Notes to Consolidated Financial Statements for
    the years ended March 31, 2004, 2003 and 2002                        |  |          | F-37 | 



---



|  |                                                                                                                                                          
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Audited financial statements for Ventura Foods,
    LLC, as of and for the year ended March 31, 2005 will be
    filed by an amendment to this Form 10-K.

(a)(2) Financial Statement Schedules

Financial statement schedules are omitted because
they are not applicable or the required information is shown in
the financial statements or notes thereto.

(a)(3) Exhibits

| |   |    |  |                                                                                                                                                                                                                                                                         
| | - | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3 | .1 |  | Articles of Incorporation of the Company, as
    amended.(13)                                                                                                                                                                                                           
| | 3 | .2 |  | Articles of Amendment to the Articles of
    Incorporation.(17)                                                                                                                                                                                                         
| | 3 | .3 |  | Bylaws of the Company, as amended.(13)                                                                                                                                                                                                                                  
| | 4 | .1 |  | Resolution Creating a Series of Preferred Equity
    to be Designated 8% Cumulative Redeemable Preferred Stock.(14)                                                                                                                                                     
| | 4 | .2 |  | Form of Certificate Representing 8% Cumulative
    Redeemable Preferred Stock.(15)                                                                                                                                                                                      
| | 4 | .3 |  | Unanimous Written Consent Resolution of the Board
    of Directors Amending the Amended and Restated Resolution
    Creating a Series of Preferred Equity to be Designated 8%
    Cumulative Redeemable Preferred Stock.(15)                                            
| | 4 | .4 |  | Unanimous Written consent Resolution of the Board
    of Directors Amending the Amended and Restated Resolution
    Creating a Series of Preferred Equity to be Designated 8%
    Cumulative Redeemable Preferred Stock to change the record date
    for dividends.(16)

65



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##### Table of Contents



| |    |      |  |                                                                                                                                                                                                                                                   
| | -- | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10 | .1   |  | Lease between the Port of Kalama and North
    Pacific Grain Growers, Inc., dated November 22, 1960.(1)                                                                                                                                           
| | 10 | .2   |  | Limited Liability Company Agreement for the
    Wilsey-Holsum Foods, LLC dated July 24, 1996.(1)                                                                                                                                                  
| | 10 | .3   |  | Long Term Supply Agreement between Wilsey-Holsum
    Foods, LLC and Harvest States Cooperatives dated August 30,
    1996.(*)(1)                                                                                                                  
| | 10 | .4   |  | TEMCO, LLC Limited Liability Company Agreement
    between Cargill, Incorporated and Cenex Harvest States
    Cooperatives dated as of August 26, 2002.(12)                                                                                       
| | 10 | .5   |  | Cenex Harvest States Cooperatives Supplemental
    Savings Plan.(7)                                                                                                                                                                               
| | 10 | .6   |  | Cenex Harvest States Cooperatives Supplemental
    Executive Retirement Plan.(7)                                                                                                                                                                  
| | 10 | .7   |  | Cenex Harvest States Cooperatives Senior
    Management Compensation Plan.(7)                                                                                                                                                                     
| | 10 | .8   |  | Cenex Harvest States Cooperatives Executive
    Long-Term Variable Compensation Plan.(7)                                                                                                                                                          
| | 10 | .9   |  | Cenex Harvest States Cooperatives Share Option
    Plan.(21)                                                                                                                                                                                      
| | 10 | .9A  |  | Amendment to Cenex Harvest States Share Option
    Plan, dated June 28, 2001.(10)                                                                                                                                                                 
| | 10 | .9B  |  | Amendment No. 2 to Cenex Harvest States
    Share Option Plan, dated May 2, 2001.(21)                                                                                                                                                             
| | 10 | .9C  |  | Amendment No. 3 to Cenex Harvest States
    Share Option Plan, dated June 4, 2002.(21)                                                                                                                                                            
| | 10 | .9D  |  | Amendment No. 4 to Cenex Harvest States
    Share Option Plan, dated April 6, 2004.(21)                                                                                                                                                           
| | 10 | .10  |  | CHS Inc. Share Option Plan Option Agreement.(21)                                                                                                                                                                                                  
| | 10 | .11  |  | CHS Inc. Share Option Plan Trust Agreement.(21)                                                                                                                                                                                                   
| | 10 | .11A |  | Amendment No. 1 to the Trust Agreement.(21)                                                                                                                                                                                                       
| | 10 | .12  |  | $225,000,000 Note Agreement (Private
    Placement Agreement) dated as of June 19, 1998 among Cenex
    Harvest States Cooperatives and each of the Purchasers of the
    Notes.(2)                                                               
| | 10 | .12A |  | First Amendment to Note Agreement ($225,000,000
    Private Placement), effective September 10, 2003, among CHS
    Inc. and each of the Purchasers of the notes.(18)                                                                             
| | 10 | .13  |  | Credit Agreement (Revolving Loan) dated as of
    May 21, 2003 among Cenex Harvest States Cooperatives,
    CoBank, ACB, SunTrust Bank, Cooperatieve Centrale
    Raiffeisen-Boerenleenbank B.A., BNP Paribas and the Syndication
    Parties.(16)
| | 10 | .13A |  | First Amendment to Credit Agreement dated as of
    May 20, 2004 between CHS Inc., CoBank, ACB, and the
    Syndication Parties.(20)                                                                                                              
| | 10 | .14  |  | $200 Million Term Loan Credit Agreement
    dated as of June 1, 1998 among Cenex Harvest States
    Cooperatives, CoBank, ACB, and St. Paul Bank for Cooperatives,
    including Exhibit 2.4 (form of $200 Million Promissory
    Note).(2)       
| | 10 | .14A |  | First Amendment to Credit Agreement (Term Loan),
    effective as of May 31, 1999 among Cenex Harvest States
    Cooperatives, CoBank, ACB, and St. Paul Bank for
    Cooperatives.(4)                                                            
| | 10 | .14B |  | Second Amendment to Credit Agreement (Term Loan)
    dated May 23, 2000 by and among Cenex Harvest States
    Cooperatives, CoBank, ACB, St. Paul Bank for Cooperatives
    and the Syndication Parties.(6)                                       
| | 10 | .14C |  | Third Amendment to Credit Agreement (Term Loan)
    dated May 23, 2001 among Cenex Harvest States Cooperatives,
    CoBank, ACB, and the Syndication Parties.(9)                                                                                  
| | 10 | .14D |  | Fourth Amendment to Credit Agreement (Term Loan)
    dated May 22, 2002 among Cenex Harvest States Cooperatives,
    CoBank, ACB and the Syndication Parties.(11)                                                                                 
| | 10 | .14E |  | Fifth Amendment to Credit Agreement (Term Loan)
    dated May 21, 2003 by and among Cenex Harvest States
    Cooperatives, CoBank, ACB and the Syndication Parties.(21)                                                                           
| | 10 | .14F |  | Sixth Amendment to Credit Agreement (Term Loan)
    dated as of May 20, 2004 by and among CHS Inc., CoBank,
    ACB, and the Syndication Parties.(20)                                                                                             
| | 10 | .15  |  | Limited Liability Agreement of United Harvest,
    LLC dated November 9, 1998 between United Grain Corporation
    and Cenex Harvest States Cooperatives.(3)                                                                                      
| | 10 | .16  |  | Joint Venture Agreement for Agriliance LLC, dated
    as of January 1, 2000 among Farmland Industries, Inc.,
    Cenex Harvest States Cooperatives, United Country Brands, LLC
    and Land OLakes, Inc.(5)                                      

66



---



##### Table of Contents



| |    |      |  |                                                                                                                                                                                                                
| | -- | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10 | .17  |  | Employment Agreement dated November 6, 2003
    by and between John D. Johnson and CHS Inc.(18)                                                                                                                
| | 10 | .18  |  | CHS Inc. Special Supplemental Executive
    Retirement Plan.(18)                                                                                                                                               
| | 10 | .19  |  | Note purchase and Private Shelf Agreement dated
    as of January 10, 2001 between Cenex Harvest States
    Cooperatives and The Prudential Insurance Company of America.(8)                                   
| | 10 | .19A |  | Amendment No. 1 to Note Purchase and Private
    Shelf Agreement, dated as of March 2, 2001.(8)                                                                                                                
| | 10 | .20  |  | Note Purchase Agreement and
    Series D & E Senior Notes dated October 18,
    2002.(12)                                                                                                                      
| | 10 | .21  |  | 2003 Amended and Restated Credit Agreement
    ($15 million, 2 Year Facility) dated December 16,
    2003 between CoBank, ACB, U.S. AgBank, FCB and the National
    Cooperative Refinery Association, Inc.(19)
| | 10 | .22  |  | Note Purchase and Private Shelf Agreement between
    CHS Inc. and Prudential Capital Group dated as of April 13,
    2004.(20)                                                                                
| | 21 | .1   |  | Subsidiaries of the Registrant.(21)                                                                                                                                                                            
| | 23 | .1   |  | Consent of Independent Registered Public
    Accounting Firm.(21)                                                                                                                                              
| | 23 | .2   |  | Independent Auditors Consent.(21)                                                                                                                                                                             
| | 24 | .1   |  | Power of Attorney.(21)                                                                                                                                                                                         
| | 31 | .1   |  | Certification Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.(21)                                                                                                                               
| | 31 | .2   |  | Certification Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.(21)                                                                                                                               
| | 32 | .1   |  | Certification Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.(21)                                                                            
| | 32 | .2   |  | Certification Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.(21)                                                                            



---



| |     |                                                                                                                                                                                                                                                           
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (*) | Pursuant to Rule 406 of the Securities Act
    of 1933, as amended, confidential portions of Exhibit 10.3
    have been deleted and filed separately with the Securities and
    Exchange Commission pursuant to a request for confidential
    treatment.
|
| | (1) | Incorporated by reference to the Companys
    Registration Statement on Form S-1 (File
    No. 333-17865), filed February 7, 1997.                                                                                                                       
|
| | (2) | Incorporated by reference to the Companys
    Form 10-Q Transition Report for the period June 1,
    1998 to August 31, 1998, filed October 14, 1998.                                                                                                    
|
| | (3) | Incorporated by reference to the Companys
    Form 10-Q for the quarterly period ended November 30,
    1998, filed January 13, 1999.                                                                                                                    
|
| | (4) | Incorporated by reference to the Companys
    Form 10-Q for the quarterly period ended May 31, 1999,
    filed July 13, 1999.                                                                                                                            
|
| | (5) | Incorporated by reference to the Companys
    Form 10-Q for the quarterly period ended February 29,
    2000 filed April 11, 2000.                                                                                                                       
|
| | (6) | Incorporated by reference to the Companys
    Form 10-Q for the quarterly period ended May 31, 2000,
    filed July 10, 2000.                                                                                                                            
|
| | (7) | Incorporated by reference to the Companys
    Form 10-K for the year ended August 31, 2000, filed
    November 22, 2000.                                                                                                                                 
|
| | (8) | Incorporated by reference to the Companys
    Form 10-Q for the quarterly period ended February 28,
    2001, filed April 10, 2001.                                                                                                                      
|
| | (9) | Incorporated by reference to the Companys
    Form 10-Q for the quarterly period ended May 31, 2001,
    filed July 3, 2001.                                                                                                                             



|     |                                                                                                                                    
|---- | -----------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to the Companys
    Registration Statement on Form S-2 (File
    No. 333-65364), filed October 26, 2001.

67



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##### Table of Contents





|     |                                                                                                                                                        
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------
|(11) | Incorporated by reference to the Companys
    Form 10-Q for the quarterly period ended May 31, 2002,
    filed July 3, 2002.                          
|    
|(12) | Incorporated by reference to the Companys
    Form 10-K for the year ended August 31, 2002, filed
    November 25, 2002.                              
|    
|(13) | Incorporated by reference to the Companys
    Form 10-Q for the quarterly period ended November 30,
    2002, filed January 9, 2003.                  
|    
|(14) | Incorporated by reference to Amendment No. 1
    to the Companys Registration Statement on Form S-2
    (File No. 333-101916), dated January 13, 2003.
|    
|(15) | Incorporated by reference to Amendment No. 2
    to the Companys Registration Statement on Form S-2
    (File No. 333-101916), dated January 23, 2003.
|    
|(16) | Incorporated by reference to the Companys
    Form 10-Q for the quarterly period ended May 31, 2003,
    filed July 2, 2003.                          
|    
|(17) | Incorporated by reference to the Companys
    Form 8-K, filed August 5, 2003.                                                                         
|    
|(18) | Incorporated by reference to the Companys
    Form 10-K for the year ended August 31, 2003 filed on
    November 21, 2003.                            
|    
|(19) | Incorporated by reference to the Companys
    Form 10-Q for the quarterly period ended February 29,
    2004, filed April 7, 2004.                    
|    
|(20) | Incorporated by reference to the Companys
    Form 10-Q for the quarterly period ended May 31, 2004,
    filed July 12, 2004.                         
|    
|(21) | Filed herewith                                                                                                                                         

(b) Exhibits



| |                                                                        
| | -----------------------------------------------------------------------
| | The exhibits shown in Item 15(a)(3) above
    are being filed herewith.

(c) Schedules



| |      
| | -----
| | None.



Supplemental Information

As a cooperative, the Company does not utilize
proxy statements.

68



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on
November 18, 2004.



| |         
| | --------
| | CHS INC.



| |     |                    
| | --- | -------------------
| | By: | /s/ JOHN D. JOHNSON

| |                                          
| | -----------------------------------------
| |                                          
| | John D. Johnson                          
| | President and Chief Executive
    Officer

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities indicated on November 18, 2004:

|                                   |  |                                                                                            |  | 
|---------------------------------- |  | ------------------------------------------------------------------------------------------ |  | 
|                                   |  |                                                                                           
|Signature                          |  | Title                                                                                     
|                                   |  |                                                                                           
|                                  
|/s/ JOHN D. JOHNSONJohn D. Johnson |  | President and Chief Executive Officer
    (principal executive officer)                   
|                                  
|/s/ JOHN SCHMITZJohn Schmitz       |  | Executive Vice President and Chief Financial
    Officer
    (principal financial officer)
|                                  
|/s/ JODELL HELLERJodell Heller     |  | Vice President and Controller
    (principal accounting officer)                          
|                                  
|Michael Toelle*                    |  | Chairman of the Board of Directors                                                        
|                                  
|Bruce Anderson*                    |  | Director                                                                                  
|Robert Bass*                       |  | Director                                                                                  
|David Bielenberg*                  |  | Director                                                                                  
|Dennis Carlson*                    |  | Director                                                                                  
|Curt Eischens*                     |  | Director                                                                                  
|Robert Elliott*                    |  | Director                                                                                  
|Steve Fritel*                      |  | Director                                                                                  
|Robert Grabarski*                  |  | Director                                                                                  
|Jerry Hasnedl*                     |  | Director                                                                                  
|Glen Keppy*                        |  | Director                                                                                  
|James Kile*                        |  | Director                                                                                  
|Randy Knecht*                      |  | Director                                                                                  
|Michael Mulcahey*                  |  | Director                                                                                  
|Richard Owen*                      |  | Director                                                                                  
|Duane Stenzel*                     |  | Director                                                                                  
|Merlin Van Walleghen*              |  | Director                                                                                  
|                                  
|*By:                               |  | /s/ JOHN D. JOHNSONJohn D. Johnson
    Attorney-in-fact                                    |  | 

69



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##### Table of Contents



CHS INC.

CONSOLIDATED BALANCE SHEETS

|                                   |                                   |                        |           |         |  |   |           |         | 
|---------------------------------- | --------------------------------- | ---------------------- | --------- | ------- |  | - | --------- | ------- | 
|                                   |                                   |                       
|                                   |                                   | August 31             
|                                   |                                   |                       
|                                   |                                   | 2004                   |           | 2003   
|                                   |                                   |                        |           |        
|                                   |                                   |                       
|                                   |                                   | (Dollars in thousands)
|ASSETS                            
|Current assets:                    |                                   |                        |           |         |  |   |           |        
|                                   | Cash and cash equivalents         |                        | $         | 136,491 |  |   | $         | 168,249 | 
|                                   | Receivables                       |                        |           | 834,965 |  |   |           | 763,780 | 
|                                   | Inventories                       |                        |           | 723,893 |  |   |           | 801,883 | 
|                                   | Other current assets              |                        |           | 273,355 |  |   |           | 178,661 | 
|                                   |                                   |                        |           |         |  |   |           |        
|Total current assets               |                                   |                        | 1,968,704 |         |  |   | 1,912,573 |        
|Investments                        |                                   |                        | 575,816   |         |  |   | 532,893   |        
|Property, plant and equipment      |                                   |                        | 1,249,655 |         |  |   | 1,122,982 |        
|Other assets                       |                                   |                        | 237,117   |         |  |   | 239,520   |        
|                                   |                                   |                        |           |         |  |   |           |        
|Total assets                       |                                   | $                      | 4,031,292 |         |  | $ | 3,807,968 |        
|                                   |                                   |                        |           |         |  |   |           |        
|                                  
|LIABILITIES AND EQUITIES          
|Current liabilities:               |                                   |                        |           |         |  |   |           |        
|                                   | Notes payable                     |                        | $         | 116,115 |  |   | $         | 251,131 | 
|                                   | Current portion of long-term debt |                        |           | 35,117  |  |   |           | 14,951  | 
|                                   | Customer credit balances          |                        |           | 88,686  |  |   |           | 58,417  | 
|                                   | Customer advance payments         |                        |           | 64,042  |  |   |           | 123,383 | 
|                                   | Checks and drafts outstanding     |                        |           | 64,584  |  |   |           | 85,239  | 
|                                   | Accounts payable                  |                        |           | 717,501 |  |   |           | 627,250 | 
|                                   | Accrued expenses                  |                        |           | 305,650 |  |   |           | 254,415 | 
|                                   | Dividends and equities payable    |                        |           | 83,569  |  |   |           | 39,049  | 
|                                   |                                   |                        |           |         |  |   |           |        
|Total current liabilities          |                                   |                        | 1,475,264 |         |  |   | 1,453,835 |        
|Long-term debt                     |                                   |                        | 648,701   |         |  |   | 648,222   |        
|Other liabilities                  |                                   |                        | 148,526   |         |  |   | 111,555   |        
|Minority interests in subsidiaries |                                   |                        | 130,715   |         |  |   | 112,645   |        
|Commitments and contingencies      |                                   |                        |           |         |  |   |           |        
|Equities                           |                                   |                        | 1,628,086 |         |  |   | 1,481,711 |        
|                                   |                                   |                        |           |         |  |   |           |        
|Total liabilities and equities     |                                   | $                      | 4,031,292 |         |  | $ | 3,807,968 |        
|                                   |                                   |                        |           |         |  |   |           |        

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

F-1



---



##### Table of Contents



CHS INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                      |                             |                               |            |            |  |      |           |           |  |   |           |           | 
|------------------------------------- | --------------------------- | ----------------------------- | ---------- | ---------- |  | ---- | --------- | --------- |  | - | --------- | --------- | 
|                                      |                             |                              
|                                      |                             | For the Years Ended August 31
|                                      |                             |                              
|                                      |                             | 2004                          |            | 2003       |  | 2002
|                                      |                             |                               |            |            |  |     
|                                      |                             |                              
|                                      |                             | (Dollars in thousands)       
|Revenues:                             |                             |                               |            |            |  |      |           |           |  |   |           |          
|                                      | Net sales                   |                               | $          | 10,909,333 |  |      | $         | 9,270,734 |  |   | $         | 7,156,454 | 
|                                      | Other revenues              |                               |            | 141,303    |  |      |           | 122,578   |  |   |           | 107,351   | 
|                                      |                             |                               |            |            |  |      |           |           |  |   |           |          
|                                      |                             |                               | 11,050,636 |            |  |      | 9,393,312 |           |  |   | 7,263,805 |          
|Cost of goods sold                    |                             |                               | 10,604,245 |            |  |      | 9,060,555 |           |  |   | 6,940,050 |          
|Marketing, general and administrative |                             |                               | 208,284    |            |  |      | 183,757   |           |  |   | 182,175   |          
|                                      |                             |                               |            |            |  |      |           |           |  |   |           |          
|Operating earnings                    |                             |                               | 238,107    |            |  |      | 149,000   |           |  |   | 141,580   |          
|Gain on sale of investment            |                             |                               | (14,666    | )          |  |      |           |           |  |   |           |          
|Gain on legal settlements             |                             |                               | (692       | )          |  |      | (10,867   | )         |  |   | (2,970    | )        
|Interest                              |                             |                               | 51,625     |            |  |      | 48,675    |           |  |   | 42,455    |          
|Equity income from investments        |                             |                               | (79,022    | )          |  |      | (47,299   | )         |  |   | (58,133   | )        
|Minority interests                    |                             |                               | 33,830     |            |  |      | 21,950    |           |  |   | 15,390    |          
|                                      |                             |                               |            |            |  |      |           |           |  |   |           |          
|Income before income taxes            |                             |                               | 247,032    |            |  |      | 136,541   |           |  |   | 144,838   |          
|Income taxes                          |                             |                               | 25,700     |            |  |      | 12,700    |           |  |   | 18,700    |          
|                                      |                             |                               |            |            |  |      |           |           |  |   |           |          
|Net income                            |                             | $                             | 221,332    |            |  | $    | 123,841   |           |  | $ | 126,138   |          
|                                      |                             |                               |            |            |  |      |           |           |  |   |           |          
|Distribution of net income:           |                             |                               |            |            |  |      |           |           |  |   |           |          
|                                      | Patronage refunds           |                               | $          | 166,850    |  |      | $         | 90,000    |  |   | $         | 92,900    | 
|                                      | Unallocated capital reserve |                               |            | 54,482     |  |      |           | 33,841    |  |   |           | 33,238    | 
|                                      |                             |                               |            |            |  |      |           |           |  |   |           |          
|Net income                            |                             | $                             | 221,332    |            |  | $    | 123,841   |           |  | $ | 126,138   |          
|                                      |                             |                               |            |            |  |      |           |           |  |   |           |          

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

F-2



---



##### Table of Contents



CHS INC.

CONSOLIDATED STATEMENTS OF EQUITIES AND
COMPREHENSIVE INCOME

|                                                              |                            |                                                    |           |              |  |           |        |             |  |         |         |               |  |         |          |          |  |   |         |        |  |   |         |         |   |   |       |  |  |   |           |         |  
|------------------------------------------------------------- | -------------------------- | -------------------------------------------------- | --------- | ------------ |  | --------- | ------ | ----------- |  | ------- | ------- | ------------- |  | ------- | -------- | -------- |  | - | ------- | ------ |  | - | ------- | ------- | - | - | ----- |  |  | - | --------- | ------- | -
|                                                              |                            |                                                   
|                                                              |                            | For the Years Ended August 31, 2004, 2003 and 2002
|                                                              |                            |                                                   
|                                                              |                            |                                                    |           | Accumulated  |  |          
|                                                              |                            | Capital                                            |           | Nonpatronage |  |           |        | Unallocated |  | Other   |         | Allocated     |  |        
|                                                              |                            | Equity                                             |           | Equity       |  | Preferred |        | Patronage   |  | Capital |         | Comprehensive |  | Capital |          | Total   
|                                                              |                            | Certificates                                       |           | Certificates |  | Stock     |        | Refunds     |  | Reserve |         | Income (Loss) |  | Reserve |          | Equities
|                                                              |                            |                                                    |           |              |  |           |        |             |  |         |         |               |  |         |          |         
|                                                              |                            |                                                   
|                                                              |                            | (Dollars in thousands)                            
|Balances, September 1, 2001                                   |                            | $                                                  | 971,873   |              |  | $         | 28,158 |             |  |         |         |               |  | $       | 90,230   |          |  | $ | 164,757 |        |  | $ | (1,915  | )       |   | $ | 8,050 |  |  | $ | 1,261,153 |        
|Dividends and equity retirement determination                 |                            |                                                    | 33,484    |              |  |           |        |             |  |         |         |               |  |         | 38,670   |          |  |   |         |        |  |   |         |         |   |   |       |  |  |   | 72,154    |        
|Patronage distribution                                        |                            |                                                    | 92,484    |              |  |           |        |             |  |         |         |               |  |         | (128,900 | )        |  |   | (3,666  | )      |  |   |         |         |   |   |       |  |  |   | (40,082   | )      
|Equities retired                                              |                            |                                                    | (31,099   | )            |  |           | (46    | )           |  |         |         |               |  |         |          |          |  |   |         |        |  |   |         |         |   |   |       |  |  |   | (31,145   | )      
|Equities issued                                               |                            |                                                    | 2,600     |              |  |           |        |             |  |         |         |               |  |         |          |          |  |   |         |        |  |   |         |         |   |   |       |  |  |   | 2,600     |        
|Preferred stock issued, net                                   |                            |                                                    |           |              |  |           |        |             |  | $       | 9,325   |               |  |         |          |          |  |   | (3,428  | )      |  |   |         |         |   |   |       |  |  |   | 5,897     |        
|Preferred stock dividends                                     |                            |                                                    |           |              |  |           |        |             |  |         |         |               |  |         |          |          |  |   | (240    | )      |  |   |         |         |   |   |       |  |  |   | (240      | )      
|Other, net                                                    |                            |                                                    | (106      | )            |  |           | (339   | )           |  |         |         |               |  |         |          |          |  |   | 100     |        |  |   |         |         |   |   |       |  |  |   | (345      | )      
|Comprehensive income:                                         |                            |                                                    |           |              |  |           |        |             |  |         |         |               |  |         |          |          |  |   |         |        |  |   |         |         |   |   |       |  |  |   |           |        
|                                                              | Net income                 |                                                    |           |              |  |           |        |             |  |         |         |               |  |         |          | 92,900   |  |   |         | 33,238 |  |   |         |         |   |   |       |  |  |   |           | 126,138 |  
|                                                              | Other comprehensive loss   |                                                    |           |              |  |           |        |             |  |         |         |               |  |         |          |          |  |   |         |        |  |   |         | (49,982 | ) |   |       |  |  |   |           | (49,982 | )
|                                                              |                            |                                                    |           |              |  |           |        |             |  |         |         |               |  |         |          |          |  |   |         |        |  |   |         |         |   |   |       |  |  |   |           |        
|Total comprehensive income                                    |                            |                                                    |           |              |  |           |        |             |  |         |         |               |  |         |          |          |  |   |         |        |  |   |         |         |   |   |       |  |  |   | 76,156    |        
|                                                              |                            |                                                    |           |              |  |           |        |             |  |         |         |               |  |         |          |          |  |   |         |        |  |   |         |         |   |   |       |  |  |   |           |        
|Dividends and equities payable                                |                            |                                                    | (28,640   | )            |  |           |        |             |  |         |         |               |  |         | (27,870  | )        |  |   |         |        |  |   |         |         |   |   |       |  |  |   | (56,510   | )      
|                                                              |                            |                                                    |           |              |  |           |        |             |  |         |         |               |  |         |          |          |  |   |         |        |  |   |         |         |   |   |       |  |  |   |           |        
|Balances, August 31, 2002                                     |                            |                                                    | 1,040,596 |              |  |           | 27,773 |             |  |         | 9,325   |               |  |         | 65,030   |          |  |   | 190,761 |        |  |   | (51,897 | )       |   |   | 8,050 |  |  |   | 1,289,638 |        
|Dividends and equity retirement determination                 |                            |                                                    | 28,639    |              |  |           |        |             |  |         |         |               |  |         | 27,870   |          |  |   |         |        |  |   |         |         |   |   |       |  |  |   | 56,509    |        
|Patronage distribution                                        |                            |                                                    | 61,784    |              |  |           |        |             |  |         |         |               |  |         | (92,900  | )        |  |   | 4,638   |        |  |   |         |         |   |   |       |  |  |   | (26,478   | )      
|Equities retired                                              |                            |                                                    | (31,092   | )            |  |           | (52    | )           |  |         |         |               |  |         |          |          |  |   |         |        |  |   |         |         |   |   |       |  |  |   | (31,144   | )      
|Equities issued                                               |                            |                                                    | 350       |              |  |           |        |             |  |         |         |               |  |         |          |          |  |   |         |        |  |   |         |         |   |   |       |  |  |   | 350       |        
|Preferred stock issued, net                                   |                            |                                                    |           |              |  |           |        |             |  |         | 86,379  |               |  |         |          |          |  |   | (3,895  | )      |  |   |         |         |   |   |       |  |  |   | 82,484    |        
|Preferred stock redeemed                                      |                            |                                                    |           |              |  |           |        |             |  |         | (2,002  | )             |  |         |          |          |  |   |         |        |  |   |         |         |   |   |       |  |  |   | (2,002    | )      
|Preferred stock dividends                                     |                            |                                                    |           |              |  |           |        |             |  |         |         |               |  |         |          |          |  |   | (3,575  | )      |  |   |         |         |   |   |       |  |  |   | (3,575    | )      
|Other, net                                                    |                            |                                                    | (2,440    | )            |  |           | (3     | )           |  |         |         |               |  |         |          |          |  |   | (4      | )      |  |   |         |         |   |   |       |  |  |   | (2,447    | )      
|Comprehensive income:                                         |                            |                                                    |           |              |  |           |        |             |  |         |         |               |  |         |          |          |  |   |         |        |  |   |         |         |   |   |       |  |  |   |           |        
|                                                              | Net income                 |                                                    |           |              |  |           |        |             |  |         |         |               |  |         |          | 90,000   |  |   |         | 33,841 |  |   |         |         |   |   |       |  |  |   |           | 123,841 |  
|                                                              | Other comprehensive income |                                                    |           |              |  |           |        |             |  |         |         |               |  |         |          |          |  |   |         |        |  |   |         | 33,584  |   |   |       |  |  |   |           | 33,584  |  
|                                                              |                            |                                                    |           |              |  |           |        |             |  |         |         |               |  |         |          |          |  |   |         |        |  |   |         |         |   |   |       |  |  |   |           |        
|Total comprehensive income                                    |                            |                                                    |           |              |  |           |        |             |  |         |         |               |  |         |          |          |  |   |         |        |  |   |         |         |   |   |       |  |  |   | 157,425   |        
|                                                              |                            |                                                    |           |              |  |           |        |             |  |         |         |               |  |         |          |          |  |   |         |        |  |   |         |         |   |   |       |  |  |   |           |        
|Dividends and equities payable                                |                            |                                                    | (10,800   | )            |  |           |        |             |  |         |         |               |  |         | (27,000  | )        |  |   | (1,249  | )      |  |   |         |         |   |   |       |  |  |   | (39,049   | )      
|                                                              |                            |                                                    |           |              |  |           |        |             |  |         |         |               |  |         |          |          |  |   |         |        |  |   |         |         |   |   |       |  |  |   |           |        
|Balances, August 31, 2003                                     |                            |                                                    | 1,087,037 |              |  |           | 27,718 |             |  |         | 93,702  |               |  |         | 63,000   |          |  |   | 220,517 |        |  |   | (18,313 | )       |   |   | 8,050 |  |  |   | 1,481,711 |        
|Dividends and equity retirement determination                 |                            |                                                    | 10,800    |              |  |           |        |             |  |         |         |               |  |         | 27,000   |          |  |   | 1,249   |        |  |   |         |         |   |   |       |  |  |   | 39,049    |        
|Patronage distribution                                        |                            |                                                    | 66,500    |              |  |           |        |             |  |         |         |               |  |         | (90,000  | )        |  |   | (5,222  | )      |  |   |         |         |   |   |       |  |  |   | (28,722   | )      
|Equities retired                                              |                            |                                                    | (10,292   | )            |  |           | (47    | )           |  |         |         |               |  |         |          |          |  |   |         |        |  |   |         |         |   |   |       |  |  |   | (10,339   | )      
|Capital equity certificates exchanged for
    preferred stock |                            |                                                    | (12,990   | )            |  |           |        |             |  |         | 12,990  |               |  |         |          |          |  |   | (150    | )      |  |   |         |         |   |   |       |  |  |   | (150      | )      
|Equities issued                                               |                            |                                                    | 13,355    |              |  |           |        |             |  |         |         |               |  |         |          |          |  |   |         |        |  |   |         |         |   |   |       |  |  |   | 13,355    |        
|Preferred stock redeemed, treasury                            |                            |                                                    |           |              |  |           |        |             |  |         |        |               |  |         |          |          |  |   |         |        |  |   |         |         |   |   |       |  |  |   |          |        
|Preferred stock dividends                                     |                            |                                                    |           |              |  |           |        |             |  |         |         |               |  |         |          |          |  |   | (7,975  | )      |  |   |         |         |   |   |       |  |  |   | (7,975    | )      
|Other, net                                                    |                            |                                                    | (7,669    | )            |  |           | (85    | )           |  |         |         |               |  |         |          |          |  |   | (30     | )      |  |   |         |         |   |   |       |  |  |   | (7,784    | )      
|Comprehensive income:                                         |                            |                                                    |           |              |  |           |        |             |  |         |         |               |  |         |          |          |  |   |         |        |  |   |         |         |   |   |       |  |  |   |           |        
|                                                              | Net income                 |                                                    |           |              |  |           |        |             |  |         |         |               |  |         |          | 166,850  |  |   |         | 54,482 |  |   |         |         |   |   |       |  |  |   |           | 221,332 |  
|                                                              | Other comprehensive income |                                                    |           |              |  |           |        |             |  |         |         |               |  |         |          |          |  |   |         |        |  |   |         | 11,178  |   |   |       |  |  |   |           | 11,178  |  
|                                                              |                            |                                                    |           |              |  |           |        |             |  |         |         |               |  |         |          |          |  |   |         |        |  |   |         |         |   |   |       |  |  |   |           |        
|Total comprehensive income                                    |                            |                                                    |           |              |  |           |        |             |  |         |         |               |  |         |          |          |  |   |         |        |  |   |         |         |   |   |       |  |  |   | 232,510   |        
|                                                              |                            |                                                    |           |              |  |           |        |             |  |         |         |               |  |         |          |          |  |   |         |        |  |   |         |         |   |   |       |  |  |   |           |        
|Dividends and equities payable                                |                            |                                                    | (32,100   | )            |  |           |        |             |  |         |         |               |  |         | (50,060  | )        |  |   | (1,409  | )      |  |   |         |         |   |   |       |  |  |   | (83,569   | )      
|                                                              |                            |                                                    |           |              |  |           |        |             |  |         |         |               |  |         |          |          |  |   |         |        |  |   |         |         |   |   |       |  |  |   |           |        
|Balances, August 31, 2004                                     |                            | $                                                  | 1,114,641 |              |  | $         | 27,586 |             |  | $       | 106,692 |               |  | $       | 116,790  |          |  | $ | 261,462 |        |  | $ | (7,135  | )       |   | $ | 8,050 |  |  | $ | 1,628,086 |        
|                                                              |                            |                                                    |           |              |  |           |        |             |  |         |         |               |  |         |          |          |  |   |         |        |  |   |         |         |   |   |       |  |  |   |           |        

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

F-3



---



##### Table of Contents



CHS INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                         |                                                                                                 |                                                          |                                       |          |         |         |          |          |         |         |          |          |         |          |  
|-------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | -------------------------------------------------------- | ------------------------------------- | -------- | ------- | ------- | -------- | -------- | ------- | ------- | -------- | -------- | ------- | -------- | -
|                                                         |                                                                                                 |                                                         
|                                                         |                                                                                                 | For the Years Ended August 31                           
|                                                         |                                                                                                 |                                                         
|                                                         |                                                                                                 | 2004                                                     |                                       | 2003     |         | 2002   
|                                                         |                                                                                                 |                                                          |                                       |          |         |        
|                                                         |                                                                                                 |                                                         
|                                                         |                                                                                                 | (Dollars in thousands)                                  
|Cash flows from operating activities:                    |                                                                                                 |                                                          |                                       |          |         |         |          |          |         |         |          |         
|                                                         | Net income                                                                                      |                                                          | $                                     | 221,332  |         |         | $        | 123,841  |         |         | $        | 126,138  |        
|                                                         | Adjustments to reconcile net income to net cash
    provided by (used in) operating activities: |                                                          |                                       |          |         |         |          |          |         |         |          |          |        
|                                                         |                                                                                                 | Depreciation and amortization                            |                                       |          | 108,399 |         |          |          | 111,347 |         |          |          | 103,986 |         
|                                                         |                                                                                                 | Noncash income from equity investments                   |                                       |          | (79,022 | )       |          |          | (47,299 | )       |          |          | (58,133 | )       
|                                                         |                                                                                                 | Minority interests                                       |                                       |          | 33,830  |         |          |          | 21,950  |         |          |          | 15,390  |         
|                                                         |                                                                                                 | Noncash portion of patronage dividends received          |                                       |          | (4,986  | )       |          |          | (1,795  | )       |          |          | (2,327  | )       
|                                                         |                                                                                                 | Loss (gain) on sale of property, plant and
    equipment |                                       |          | 775     |         |          |          | 741     |         |          |          | (6,418  | )       
|                                                         |                                                                                                 | Deferred tax expense                                     |                                       |          | 8,500   |         |          |          | 9,000   |         |          |          | 4,400   |         
|                                                         |                                                                                                 | Gain on sale of investment                               |                                       |          | (14,666 | )       |          |          |         |         |          |          |         |         
|                                                         |                                                                                                 | Other, net                                               |                                       |          | 1,150   |         |          |          | 4,052   |         |          |          | 5,467   |         
|                                                         |                                                                                                 | Changes in operating assets and liabilities:             |                                       |          |         |         |          |          |         |         |          |          |         |         
|                                                         |                                                                                                 |                                                          | Receivables                           |          |         | (59,039 | )        |          |         | (18,669 | )        |          |         | (32,517  | )
|                                                         |                                                                                                 |                                                          | Inventories                           |          |         | 88,261  |          |          |         | (25,692 | )        |          |         | (255,107 | )
|                                                         |                                                                                                 |                                                          | Other current assets and other assets |          |         | (89,237 | )        |          |         | (83,347 | )        |          |         | (86,636  | )
|                                                         |                                                                                                 |                                                          | Customer credit balances              |          |         | 27,639  |          |          |         | 30,238  |          |          |         | (12,025  | )
|                                                         |                                                                                                 |                                                          | Customer advance payments             |          |         | (59,354 | )        |          |         | (45,740 | )        |          |         | 59,988   |  
|                                                         |                                                                                                 |                                                          | Accounts payable and accrued expenses |          |         | 121,647 |          |          |         | 135,310 |          |          |         | 92,781   |  
|                                                         |                                                                                                 |                                                          | Other liabilities                     |          |         | 28,060  |          |          |         | 2,569   |          |          |         | 9,079    |  
|                                                         |                                                                                                 |                                                          |                                       |          |         |         |          |          |         |         |          |         
|Net cash provided by (used in) operating
    activities  |                                                                                                 |                                                          | 333,289                               |          |         |         | 216,506  |          |         |         | (35,934  | )       
|                                                         |                                                                                                 |                                                          |                                       |          |         |         |          |          |         |         |          |         
|Cash flows from investing activities:                    |                                                                                                 |                                                          |                                       |          |         |         |          |          |         |         |          |         
|                                                         | Acquisition of property, plant and equipment                                                    |                                                          |                                       | (245,148 | )       |         |          | (175,689 | )       |         |          | (140,169 | )      
|                                                         | Proceeds from disposition of property, plant and
    equipment                                  |                                                          |                                       | 34,530   |         |         |          | 26,886   |         |         |          | 20,205   |        
|                                                         | Investments                                                                                     |                                                          |                                       | (49,757  | )       |         |          | (43,478  | )       |         |          | (6,211   | )      
|                                                         | Equity investments redeemed                                                                     |                                                          |                                       | 65,158   |         |         |          | 35,939   |         |         |          | 37,689   |        
|                                                         | Investments redeemed                                                                            |                                                          |                                       | 9,481    |         |         |          | 8,467    |         |         |          | 6,310    |        
|                                                         | Proceeds from sale of investment                                                                |                                                          |                                       | 25,000   |         |         |          |          |         |         |          |          |        
|                                                         | Changes in notes receivable                                                                     |                                                          |                                       | (6,888   | )       |         |          | (6,630   | )       |         |          | (22,031  | )      
|                                                         | Acquisitions of intangible assets                                                               |                                                          |                                       |          |         |         |          | (767     | )       |         |          | (29,501  | )      
|                                                         | Acquisitions of working capital, net                                                            |                                                          |                                       |          |         |         |          | (13,030  | )       |         |          | (5,750   | )      
|                                                         | Distributions to minority owners                                                                |                                                          |                                       | (15,908  | )       |         |          | (4,444   | )       |         |          | (7,413   | )      
|                                                         | Other investing activities, net                                                                 |                                                          |                                       | 2,248    |         |         |          | (507     | )       |         |          | (685     | )      
|                                                         |                                                                                                 |                                                          |                                       |          |         |         |          |          |         |         |          |         
|Net cash used in investing activities                    |                                                                                                 |                                                          | (181,284                              | )        |         |         | (173,253 | )        |         |         | (147,556 | )       
|                                                         |                                                                                                 |                                                          |                                       |          |         |         |          |          |         |         |          |         
|Cash flows from financing activities:                    |                                                                                                 |                                                          |                                       |          |         |         |          |          |         |         |          |         
|                                                         | Changes in notes payable                                                                        |                                                          |                                       | (135,016 | )       |         |          | (81,383  | )       |         |          | 235,319  |        
|                                                         | Borrowings on long-term debt                                                                    |                                                          |                                       | 35,457   |         |         |          | 175,000  |         |         |          | 30,000   |        
|                                                         | Principal payments on long-term debt                                                            |                                                          |                                       | (15,299  | )       |         |          | (89,512  | )       |         |          | (17,968  | )      
|                                                         | Payments on derivative financial instruments, net                                               |                                                          |                                       | (287     | )       |         |          | (7,574   | )       |         |          |          |        
|                                                         | Changes in checks and drafts outstanding                                                        |                                                          |                                       | (21,431  | )       |         |          | 988      |         |         |          | (3,557   | )      
|                                                         | Proceeds from sale of preferred stock, net of
    expenses                                      |                                                          |                                       | (151     | )       |         |          | 82,484   |         |         |          | 5,897    |        
|                                                         | Redemptions of preferred stock                                                                  |                                                          |                                       |          |         |         |          | (2,002   | )       |         |          |          |        
|                                                         | Preferred stock dividends paid                                                                  |                                                          |                                       | (7,975   | )       |         |          | (3,575   | )       |         |          | (240     | )      
|                                                         | Retirements of equities                                                                         |                                                          |                                       | (10,339  | )       |         |          | (31,144  | )       |         |          | (31,145  | )      
|                                                         | Cash patronage dividends paid                                                                   |                                                          |                                       | (28,722  | )       |         |          | (26,478  | )       |         |          | (40,082  | )      
|                                                         |                                                                                                 |                                                          |                                       |          |         |         |          |          |         |         |          |         
|Net cash (used in) provided by financing
    activities  |                                                                                                 |                                                          | (183,763                              | )        |         |         | 16,804   |          |         |         | 178,224  |         
|                                                         |                                                                                                 |                                                          |                                       |          |         |         |          |          |         |         |          |         
|Net (decrease) increase in cash and cash
    equivalents |                                                                                                 |                                                          | (31,758                               | )        |         |         | 60,057   |          |         |         | (5,266   | )       
|Cash and cash equivalents at beginning of period         |                                                                                                 |                                                          | 168,249                               |          |         |         | 108,192  |          |         |         | 113,458  |         
|                                                         |                                                                                                 |                                                          |                                       |          |         |         |          |          |         |         |          |         
|Cash and cash equivalents at end of period               |                                                                                                 | $                                                        | 136,491                               |          |         | $       | 168,249  |          |         | $       | 108,192  |         
|                                                         |                                                                                                 |                                                          |                                       |          |         |         |          |          |         |         |          |         

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

F-4



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##### Table of Contents



CHS INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



|   |                                                
|-- | -----------------------------------------------
|1. | Summary of Significant Accounting
    Policies:



| |              
| | -------------
| | Organization:

CHS Inc. (CHS or the Company) is an agricultural
cooperative organized for the mutual benefit of its members.
Members of the cooperative are located throughout the United
States. In addition to grain marketing, oilseed processing,
foods and wheat milling, the Company provides its patrons with
energy and agronomy products, as well as other production
agricultural inputs. Sales are both domestic and international.



| |               
| | --------------
| | Consolidation:

The consolidated financial statements include the
accounts of CHS and all of its wholly-owned and majority-owned
subsidiaries, including National Cooperative Refinery
Association (NCRA). The effects of all significant intercompany
transactions have been eliminated.

The Company had various acquisitions, which have
been accounted for using the purchase method of accounting.
Operating results of the acquisitions are included in the
consolidated financial statements since the respective
acquisition dates. The respective purchase prices were allocated
to the assets and liabilities acquired based upon the estimated
fair values. The excess purchase price over the estimated fair
values of the net assets acquired has been reported as
identifiable intangible assets and goodwill.



| |                  
| | -----------------
| | Cash Equivalents:

Cash equivalents include short-term, highly
liquid investments with original maturities of three months or
less at the date of acquisition.



| |             
| | ------------
| | Inventories:

Grain, processed grain, oilseed and processed
oilseed are stated at net realizable values, which approximates
market values. All other inventories are stated at the lower of
cost or market. Costs for inventories produced or modified by
the Company through a manufacturing process include fixed and
variable production and raw material costs, and in-bound freight
costs for raw materials over the amount charged to cost of goods
sold. Costs for inventories purchased for resale include the
cost of products and freight incurred to place the products at
the Companys points of sales. The cost of certain energy
inventories (wholesale refined products, crude oil and asphalt)
is determined on the last-in, first-out (LIFO) method; all other
inventories of non-grain products purchased for resale are
valued on the first-in, first-out (FIFO) and average cost
methods.



| |                                      
| | -------------------------------------
| | Derivative Financial
    Instruments:

The Company enters into exchange-traded commodity
futures and options contracts to hedge its exposure to price
fluctuations on energy, grain and oilseed transactions to the
extent considered practicable for minimizing risk. Futures and
options contracts used for hedging are purchased and sold
through regulated commodity exchanges. Fluctuations in inventory
valuations, however, may not be completely hedged, due in part
to the absence of satisfactory hedging facilities for certain
commodities and geographical areas and in part to the
Companys assessment of its exposure from expected price
fluctuations. The Company also manages its risks by entering
into fixed-price purchase contracts with pre-approved producers
and establishing appropriate limits for individual suppliers.
Fixed-price sales contracts are entered into with customers of
acceptable creditworthiness, as internally evaluated. The
Company is exposed to loss in the event of nonperformance by the
counterparties to the contracts and therefore, contract values
are reviewed and adjusted to reflect potential nonperformance.

F-5



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Commodity trading in futures and options
contracts is a natural extension of cash market trading. The
commodity futures and options markets have underlying principles
of increased liquidity and longer trading periods than the cash
market, and hedging is one method of reducing exposure to price
fluctuations. The Companys use of derivative instruments
described above reduces the effects of price volatility, thereby
protecting against adverse short-term price movements while
somewhat limiting the benefits of short-term price movements.
Changes in market values of derivative instruments described
above are recognized in the consolidated statements of
operations in the period such changes occur. The fair value of
futures and options contracts are determined primarily from
quotes listed on regulated commodity exchanges. Fixed-price
purchase and sales contracts are with various counterparties,
and the fair values of such contracts are determined from the
market price of the underlying product. Included in other
current assets on August 31, 2004 and 2003 are derivative
assets of $91.3 million and $54.5 million,
respectively. Included in accrued expenses on August 31,
2004 and 2003 are derivative liabilities of $110.8 million
and $46.5 million, respectively.



| |                      
| | ---------------------
| | Commodity Price Risk:

The Company utilizes futures and options
contracts offered through regulated commodity exchanges to
reduce price risk. The Company is exposed to risk of loss in the
market value of inventories and fixed or partially fixed
purchase and sales contracts. In order to reduce that risk, the
Company generally takes opposite and offsetting positions using
futures contracts or options. Certain commodities cannot be
hedged with futures or options contracts because such contracts
are not offered for these commodities by regulated commodity
exchanges. Inventories and purchase contracts for those
commodities are hedged with forward sales contracts, to the
extent practical, in order to arrive at a net commodity position
within the formal position limits set by the Company and deemed
prudent for each of those commodities. Commodities for which
future contracts and options are available are also typically
hedged with forward contracts, with futures and options used to
hedge within position limits the remaining portion. These
futures and options contracts and forward purchase and sales
contracts used to hedge against commodity price changes are
effective economic hedges of price risk, but they are not
designated as, and accounted for as, hedging instruments for
accounting purposes.

Unrealized gains and losses on futures contracts
and options used as economic hedges of grain and oilseed
inventories and fixed-price contracts are recognized in cost of
goods sold for financial reporting using market-based prices.
Inventories and fixed-price contracts are marked to fair value
using market-based prices so that gains or losses on the
derivative contracts are offset by gains or losses on
inventories and fixed-price contracts.

Unrealized gains and losses on futures contracts
and options used as economic hedges of energy inventories and
fixed-price contracts are recognized in cost of goods sold for
financial reporting using market-based prices. The inventories
hedged with these derivatives are valued at the lower of cost or
fair value, and fixed-price contracts are marked to fair value
using market-based prices. Certain fixed-price contracts related
to propane in the Energy segment meet the normal purchase and
sales exemption, and thus are not required to be marked to fair
value.



| |                    
| | -------------------
| | Interest Rate Risk:

The Company manages interest expense using fixed
and floating rate debt. These debt instruments are carried at
amounts approximating estimated fair value. Short-term debt used
to finance inventories and receivables, is represented by notes
payable within thirty days or less so that the blended interest
rate to the Company for all such notes approximates current
market rates. Long-term debt used to finance non-current assets
carries various fixed interest rates and is payable at various
dates to minimize the effect of

F-6



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

market interest rate changes. The effective
interest rate to the Company on fixed-rate debt outstanding on
August 31, 2004, was approximately 6.4%.

In fiscal years 2002 and 2004, the Company
entered into interest rate treasury lock instruments to secure
the interest rates related to a portion of its private placement
debts issued on October 18, 2002, and September 21,
2004. These instruments were designated and are effective as
cash flow hedges for accounting purposes and, accordingly, the
net loss on settlements were recorded as a component of other
comprehensive income. Interest expense for the years ended
August 31, 2004 and 2003, includes $0.9 million and
$0.7 million, respectively, related to the interest rate
derivatives. The additional interest expense is an offset to the
lower actual interest paid on the outstanding debt instruments.



| |                       
| | ----------------------
| | Foreign Currency Risk:

The Company conducts essentially all of its
business in U.S. dollars, except for grain marketing operations
in Brazil and purchases of products from Canada, and had minimal
risk regarding foreign currency fluctuations during 2004 and in
prior years. Foreign currency fluctuations do, however, impact
the ability of foreign buyers to purchase U.S. agricultural
products and the competitiveness of U.S. agricultural products
compared to the same products offered by alternative sources of
world supply.



| |             
| | ------------
| | Investments:

Investments in other cooperatives are stated at
cost, plus patronage dividends received in the form of capital
stock and other equities. Patronage dividends are recorded in
other revenues at the time qualified written notices of
allocation are received. Joint ventures and other investments,
in which the Company has significant ownership and influence,
but not control, are accounted for in the consolidated financial
statements under the equity method of accounting. Investments in
other debt and equity securities are considered available for
sale financial instruments and are stated at market value, with
unrealized amounts included as a component of accumulated other
comprehensive income.



| |                                   
| | ----------------------------------
| | Property, Plant and
    Equipment:

Property, plant and equipment are stated at cost
less accumulated depreciation and amortization. Depreciation and
amortization are provided on the straight-line method by charges
to operations at rates based upon the expected useful lives of
individual or groups of assets (primarily 15 to 40 years
for land improvements and buildings and 3 to 20 years for
machinery, equipment, office and other). The cost and related
accumulated depreciation and amortization of assets sold or
otherwise disposed of are removed from the related accounts and
resulting gains or losses are reflected in operations.
Expenditures for maintenance and repairs and minor renewals are
expensed, while costs of major renewals and betterments are
capitalized.

The Company periodically reviews property, plant
and equipment and other long-lived assets in order to assess
recoverability based on projected income and related cash flows
on an undiscounted basis. Should the sum of the expected future
net cash flows be less than the carrying value, an impairment
loss would be recognized. An impairment loss would be measured
by the amount by which the carrying value of the asset exceeds
the fair value of the asset.



| |                                          
| | -----------------------------------------
| | Goodwill and Other Intangible
    Assets:

Goodwill represents the excess of the purchase
price of an acquired entity over the amounts assigned to assets
acquired and liabilities assumed. Goodwill is no longer
amortized in accordance with Statement of Financial Accounting
Standards (SFAS) No. 142, but reviewed for impairment
annually, or more frequently if certain impairment conditions
arise, on the basis of undiscounted cash flows. After analysis,

F-7



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

assets that are deemed to require impairment are
written down to fair market value. Other intangible assets
consists primarily of trademarks, patents, customer lists and
agreements not to compete. Intangible assets subject to
amortization are provided on a straight-line basis over the
number of years that approximate their respective useful lives
(ranging from 5 to 15 years).



| |                     
| | --------------------
| | Revenue Recognition:

The Company provides a wide variety of products
and services, from production agricultural inputs such as fuels,
farm supplies and crop nutrients, to agricultural outputs that
include grain and oilseed, processed grains and oilseeds and
food products. Grain and oilseed sales are recorded after the
commodity has been delivered to its destination and final
weights, grades and settlement prices have been agreed upon. All
other sales are recognized upon transfer of title, which could
occur upon either shipment or receipt by the customer, depending
upon the transactions. Amounts billed to a customer as part of a
sales transaction related to shipping and handling are included
in net sales. Service revenues are recorded only after such
services have been rendered, and are included in other revenues.



| |                            
| | ---------------------------
| | Environmental Expenditures:

Liabilities, including legal costs, related to
remediation of contaminated properties are recognized when the
related costs are considered probable and can be reasonably
estimated. Estimates of environmental costs are based on current
available facts, existing technology, undiscounted site-specific
costs and currently enacted laws and regulations. Recoveries, if
any, are recorded in the period in which recovery is considered
probable. Liabilities are monitored and adjusted as new facts or
changes in law or technology occur. Environmental expenditures
are capitalized when such costs provide future
economic benefits.



| |              
| | -------------
| | Income Taxes:

The Company is a nonexempt agricultural
cooperative and files a consolidated federal income tax return
with its 80% or more owned subsidiaries. The Company is subject
to tax on income from nonpatronage sources and undistributed
patronage-sourced income. Deferred income taxes reflect the
impact of temporary differences between the amounts of assets
and liabilities recognized for financial reporting purposes and
such amounts recognized for federal and state income tax
purposes, at each fiscal year end based on enacted tax laws and
statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation
allowances are established, when necessary, to reduce deferred
tax assets to the amount expected to be realized.



| |                      
| | ---------------------
| | Comprehensive Income:

Comprehensive income primarily includes net
income and the effects of minimum pension liability adjustments.
Total comprehensive income is reflected in the consolidated
statements of equities and comprehensive income.



| |                  
| | -----------------
| | 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 and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

F-8



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                      
| | -------------------------------------
| | Recent Accounting
    Pronouncements:

In May 2003, the Financial Accounting Standards
Board (FASB) issued SFAS No. 150, Accounting for
Certain Financial Instruments with Characteristics of Both
Liabilities and Equity, which establishes standards for
how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity.
It requires that an issuer classify a financial instrument that
is within its scope as a liability (or an asset in certain
circumstances). SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The Statement is to
be implemented by reporting the cumulative effect of a change in
an accounting principle for financial instruments created before
the issuance date of the Statement and still existing at the
beginning of the interim period of adoption. Adoption of this
standard did not have an effect on the Company.

In December 2003, the FASB issued SFAS
No. 132R, Employers Disclosures about Pensions
and Other Postretirement Benefits. This statement requires
additional disclosures to be made by employers regarding
pensions and other postretirement benefit plans, but does not
change the measurement or recognition of those plans. Under this
Statement, the disclosure provisions regarding foreign plans and
estimated future benefit payments are effective for fiscal years
ending after December 15, 2003 and interim periods
beginning after December 15, 2003. The Company has adopted
the interim and annual disclosure provisions of this Statement
during the current fiscal year.

In December 2003, the FASB revised FASB
Interpretation No. 46, Consolidation of Variable
Interest Entities. The interpretation addresses
consolidation of certain entities in which equity investors do
not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial
support from other parties. It also requires consolidation by
the primary beneficiary. For public entities the interpretation
applies to interests in variable interest entities for periods
ending after March 15, 2004, the Companys third
quarter. Adoption of this standard did not have an effect on the
Company.

On May 19, 2004, the FASB issued a FASB
Staff Position (FSP) regarding SFAS No. 106,
Employers Accounting for Postretirement Benefits
Other Than Pensions. FSP 106-2, Accounting and
Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003, discusses
the effects of the Medicare Prescription Drug, Improvement and
Modernization Act (the Act) enacted on December 8, 2003.
FSP 106-2 considers the effect of the two new features
introduced in the Act in determining accumulated postretirement
benefit obligation (APBO) and net periodic postretirement
benefit cost, which may serve to reduce a companys
post-retirement benefit costs. Companies may elect to defer
accounting for this benefit or may attempt to reflect the best
estimate of the impact of the Act on net periodic costs. The
Company has chosen to defer accounting for the benefit until the
FASB issues final accounting guidance due to various
uncertainties related to this legislation. The Companys
measures of APBO and net periodic postretirement benefit costs
as of and for the year ended August 31, 2004 do not reflect
the effect of the Act as permitted by the FSP.

In March 2004, the FASB Emerging Issues Task
Force (EITF) reached a consensus on and the FASB ratified EITF
Issue No. 03-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments
(EITF 03-1). EITF 03-1 provides guidance for
evaluating whether an investment is other-than-temporarily
impaired. On September 30, 2004, the FASB issued
FSP EITF 03-1-1, Effective Date of
Paragraphs 10-20 of EITF Issue No. 03-1,
The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments, which delayed
the effective date of the application guidance on impairment of
securities included within EITF 03-1. The Company is still
evaluating the potential impact of the adoption of
EITF 03-1.

F-9



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                   
| | ------------------
| | Reclassifications:

Certain reclassifications have been made to prior
years amounts to conform to current year classifications.
These reclassifications and changes had no effect on previously
reported net income, equities and comprehensive income, or
cash flows.

2.     Receivables:

Receivables as of August 31, 2004 and 2003
are as follows:

|                                      |  |                        |         |      |  |   |         | 
|------------------------------------- |  | ---------------------- | ------- | ---- |  | - | ------- | 
|                                      |  | 2004                   |         | 2003
|                                      |  |                        |         |     
|                                      |  |                       
|                                      |  | (Dollars in thousands)
|Trade                                 |  | $                      | 835,066 |      |  | $ | 748,398 | 
|Other                                 |  |                        | 55,708  |      |  |   | 47,000  | 
|                                      |  |                        |         |      |  |   |         | 
|                                      |  |                        | 890,774 |      |  |   | 795,398 | 
|Less allowances for doubtful accounts |  |                        | 55,809  |      |  |   | 31,618  | 
|                                      |  |                        |         |      |  |   |         | 
|                                      |  | $                      | 834,965 |      |  | $ | 763,780 | 
|                                      |  |                        |         |      |  |   |         | 

All international sales are denominated in U.S.
dollars. International sales for the years ended August 31,
2004, 2003 and 2002 are as follows:

|                              |  |                       |       |      |  |      |       |  |  |   |       | 
|----------------------------- |  | --------------------- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                              |  | 2004                  |       | 2003 |  | 2002
|                              |  |                       |       |      |  |     
|                              |  |                      
|                              |  | (Dollars in millions)
|Africa                        |  | $                     | 112   |      |  | $    | 99    |  |  | $ | 135   | 
|Asia                          |  |                       | 1,104 |      |  |      | 815   |  |  |   | 407   | 
|Europe                        |  |                       | 158   |      |  |      | 156   |  |  |   | 282   | 
|North America, excluding U.S. |  |                       | 456   |      |  |      | 367   |  |  |   | 298   | 
|South America                 |  |                       | 209   |      |  |      | 166   |  |  |   | 100   | 
|                              |  |                       |       |      |  |      |       |  |  |   |       | 
|                              |  | $                     | 2,039 |      |  | $    | 1,603 |  |  | $ | 1,222 | 
|                              |  |                       |       |      |  |      |       |  |  |   |       | 

3.     Inventories:

Inventories as of August 31, 2004 and 2003
are as follows:

|                            |  |                        |         |      |  |   |         | 
|--------------------------- |  | ---------------------- | ------- | ---- |  | - | ------- | 
|                            |  | 2004                   |         | 2003
|                            |  |                        |         |     
|                            |  |                       
|                            |  | (Dollars in thousands)
|Grain and oilseed           |  | $                      | 308,207 |      |  | $ | 370,381 | 
|Energy                      |  |                        | 277,801 |      |  |   | 292,095 | 
|Feed and farm supplies      |  |                        | 110,885 |      |  |   | 95,589  | 
|Processed grain and oilseed |  |                        | 25,740  |      |  |   | 42,688  | 
|Other                       |  |                        | 1,260   |      |  |   | 1,130   | 
|                            |  |                        |         |      |  |   |         | 
|                            |  | $                      | 723,893 |      |  | $ | 801,883 | 
|                            |  |                        |         |      |  |   |         | 

As of August 31, 2004, the Company valued
approximately 24% of inventories, primarily related to energy,
using the lower of cost, determined on the LIFO method, or
market (24% as of August 31, 2003). If the FIFO method of
accounting for these inventories had been used, inventories
would have been higher than the reported amount by
$160.3 million and $86.3 million at August 31,
2004 and 2003, respectively.

F-10



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

4.     Investments:

Investments as of August 31, 2004 and 2003
are as follows:

|                |                                              |                        |         |         |  |   |         |         | 
|--------------- | -------------------------------------------- | ---------------------- | ------- | ------- |  | - | ------- | ------- | 
|                |                                              | 2004                   |         | 2003   
|                |                                              |                        |         |        
|                |                                              |                       
|                |                                              | (Dollars in thousands)
|Cooperatives:   |                                              |                        |         |         |  |   |         |        
|                | CF Industries, Inc.                          |                        | $       | 152,996 |  |   | $       | 152,996 | 
|                | Land OLakes, Inc.                           |                        |         | 31,057  |  |   |         | 27,105  | 
|                | Ag Processing, Inc.                          |                        |         | 24,866  |  |   |         | 24,481  | 
|                | CoBank ACB (CoBank)                          |                        |         | 16,625  |  |   |         | 22,505  | 
|Joint ventures: |                                              |                        |         |         |  |   |         |        
|                | United Country Brands, LLC (Agriliance, LLC) |                        |         | 167,597 |  |   |         | 129,286 | 
|                | Ventura Foods, LLC                           |                        |         | 107,719 |  |   |         | 107,464 | 
|                | TEMCO, LLC                                   |                        |         | 5,776   |  |   |         | 9,087   | 
|Other           |                                              |                        | 69,180  |         |  |   | 59,969  |        
|                |                                              |                        |         |         |  |   |         |        
|                |                                              | $                      | 575,816 |         |  | $ | 532,893 |        
|                |                                              |                        |         |         |  |   |         |        

The CHS investment in CF Industries, Inc.
(CF) is carried at cost, including allocated patronage
refunds. CHS recognizes income from this investment when
qualified patronage refunds are received. In each of the years
1998 through 2003, CF has generated operating losses, none of
which were allocated to its owners. CHS management has performed
the appropriate impairment tests of this investment, and based
upon those tests, believes that the fair market value exceeds
its carrying value. CHS will continue to perform impairment
tests annually, or as circumstances dictate, including reviewing
operating results, which could result in impairment to its
CF investment.

The Company has a 50% interest in Ventura Foods,
LLC, a joint venture, which produces and distributes
oilseed-based products. The following provides summarized
unaudited financial information for Ventura Foods, LLC balance
sheets as of August 31, 2004 and 2003, and statements of
operations for the twelve months ended August 31, 2004,
2003 and 2002:

|                        |  |                        |         |      |  |   |         | 
|----------------------- |  | ---------------------- | ------- | ---- |  | - | ------- | 
|                        |  | 2004                   |         | 2003
|                        |  |                        |         |     
|                        |  |                       
|                        |  | (Dollars in thousands)
|Current assets          |  | $                      | 286,613 |      |  | $ | 193,632 | 
|Non-current assets      |  |                        | 258,270 |      |  |   | 231,649 | 
|Current liabilities     |  |                        | 171,269 |      |  |   | 227,400 | 
|Non-current liabilities |  |                        | 194,547 |      |  |   | 21,738  | 

|             |  |                        |           |      |  |      |           |  |  |   |           | 
|------------ |  | ---------------------- | --------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|             |  | 2004                   |           | 2003 |  | 2002
|             |  |                        |           |      |  |     
|             |  |                       
|             |  | (Dollars in thousands)
|Net sales    |  | $                      | 1,425,061 |      |  | $    | 1,165,823 |  |  | $ | 1,013,475 | 
|Gross profit |  |                        | 167,581   |      |  |      | 155,274   |  |  |   | 181,217   | 
|Net income   |  |                        | 44,696    |      |  |      | 42,837    |  |  |   | 75,368    | 

Agriliance, LLC (Agriliance) is owned and
governed by Land OLakes, Inc. (50%) and United Country
Brands, LLC (50%). United Country Brands, LLC, was initially
owned and governed 50% by the Company and 50% by Farmland
Industries, Inc. (Farmland), and was formed solely to hold a 50%
interest in Agriliance. Initially, the Companys indirect
share of earnings (economic interest) in Agriliance was 25%,
which was the same as the Companys ownership or governance
interest. In April 2003, the Company acquired an additional
13.1% economic interest in the wholesale crop protection
business of

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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Agriliance (the CPP Business), which
constituted only a part of the Agriliance business operations,
for a cash payment of $34.3 million. After the transaction,
the economic interests in Agriliance were owned 50% by Land
OLakes, Inc. 25% plus an additional 13.1% of the CPP
Business by the Company and 25% less 13.1% of the CPP Business
by Farmland. The ownership or governance interests in Agriliance
did not change with the purchase of this additional economic
interest. Agriliances earnings were split among the
members based upon the respective economic interests of each
member. On April 30, 2004, the Company purchased all of
Farmlands remaining interest in Agriliance for
$27.5 million in cash. The Company now owns 50% of the
economic and governance interests in Agriliance, and continues
to account for this investment using the equity method of
accounting.

The following provides summarized financial
information for Agriliance balance sheets as of August 31,
2004 and 2003, and statements of operations for the years ended
August 31, 2004, 2003 and 2002:

|                        |  |                        |           |      |  |   |           | 
|----------------------- |  | ---------------------- | --------- | ---- |  | - | --------- | 
|                        |  | 2004                   |           | 2003
|                        |  |                        |           |     
|                        |  |                       
|                        |  | (Dollars in thousands)
|Current assets          |  | $                      | 1,123,671 |      |  | $ | 1,249,891 | 
|Non-current assets      |  |                        | 123,106   |      |  |   | 119,615   | 
|Current liabilities     |  |                        | 878,814   |      |  |   | 1,083,693 | 
|Non-current liabilities |  |                        | 128,780   |      |  |   | 27,061    | 

|                         |  |                        |           |      |  |      |           |  |  |   |           | 
|------------------------ |  | ---------------------- | --------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|                         |  | 2004                   |           | 2003 |  | 2002
|                         |  |                        |           |      |  |     
|                         |  |                       
|                         |  | (Dollars in thousands)
|Net sales                |  | $                      | 3,477,528 |      |  | $    | 3,485,623 |  |  | $ | 3,625,849 | 
|Earnings from operations |  |                        | 82,221    |      |  |      | 67,239    |  |  |   | 57,604    | 
|Net income               |  |                        | 71,278    |      |  |      | 60,741    |  |  |   | 47,044    | 

During the year ended August 31, 2004, NCRA
exercised its right of first refusal to purchase a partial
interest in a crude oil pipeline for $16.0 million,
increasing their holding to 100%. NCRA subsequently sold a 50%
interest in the same pipeline to another third party for
proceeds of $25.0 million and recorded a pre-tax gain on
the sale of $14.7 million.

Disclosure of the fair value of financial
instruments to which the Company is a party includes estimates
and assumptions which may be subjective in nature and involve
uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Financial instruments are
carried at amounts that approximate estimated fair values.
Investments in cooperatives and joint ventures have no quoted
market prices.

Various agreements with other owners of investee
companies and a majority-owned subsidiary set out parameters
whereby CHS may buy and sell additional interests in those
companies, upon the occurrence of certain events, at fair values
determinable as set forth in the specific agreements.

F-12



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                               
|-- | ------------------------------
|5. | Property, Plant and Equipment:

A summary of property, plant and equipment as of
August 31, 2004 and 2003 is as follows:

|                                               |  |                        |           |      |  |   |           | 
|---------------------------------------------- |  | ---------------------- | --------- | ---- |  | - | --------- | 
|                                               |  | 2004                   |           | 2003
|                                               |  |                        |           |     
|                                               |  |                       
|                                               |  | (Dollars in thousands)
|Land and land improvements                     |  | $                      | 64,709    |      |  | $ | 60,453    | 
|Buildings                                      |  |                        | 422,545   |      |  |   | 380,940   | 
|Machinery and equipment                        |  |                        | 1,618,428 |      |  |   | 1,515,976 | 
|Office and other                               |  |                        | 65,296    |      |  |   | 61,356    | 
|Construction in progress                       |  |                        | 214,988   |      |  |   | 159,555   | 
|                                               |  |                        |           |      |  |   |           | 
|                                               |  |                        | 2,385,966 |      |  |   | 2,178,280 | 
|Less accumulated depreciation and amortization |  |                        | 1,136,311 |      |  |   | 1,055,298 | 
|                                               |  |                        |           |      |  |   |           | 
|                                               |  | $                      | 1,249,655 |      |  | $ | 1,122,982 | 
|                                               |  |                        |           |      |  |   |           | 

In January 2002, the Company formed a limited
liability company with Cargill, Incorporated to engage in wheat
flour milling and processing. The Company holds a 24% interest
in the entity, which is known as Horizon Milling, LLC. The
Company is leasing certain of its wheat milling facilities and
related equipment to Horizon Milling, LLC under an operating
lease agreement. The book value of the leased milling assets at
August 31, 2004, was $93.6 million, net of accumulated
depreciation of $37.1 million.

For the years ended August 31, 2004, 2003
and 2002, the Company capitalized interest of $2.8 million,
$3.9 million and $2.1 million, respectively, related
to capitalized construction projects.

During 2003, the Company adopted SFAS
No. 143, Accounting for Asset Retirement
Obligations, which addresses financial accounting and
reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement
costs. SFAS No. 143 is effective for financial statements
issued for fiscal years beginning after June 15, 2002. The
Companys Energy segment operates oil refineries and
related pipelines for which the Company would be subject to
Asset Retirement Obligations (ARO) if such assets were to
be dismantled. The Company, however, expects to operate its
refineries and related pipelines indefinitely. Since the time
period to dismantle these assets is indeterminate, a
corresponding ARO is not estimable and therefore has not
been recorded.

F-13



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |              
|-- | -------------
|6. | Other Assets:

Other assets as of August 31, 2004 and 2003
are as follows:

|                                                                                              |  |                        |         |      |  |   |         | 
|--------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | ---- |  | - | ------- | 
|                                                                                              |  | 2004                   |         | 2003
|                                                                                              |  |                        |         |     
|                                                                                              |  |                       
|                                                                                              |  | (Dollars in thousands)
|Goodwill                                                                                      |  | $                      | 26,896  |      |  | $ | 27,052  | 
|Customer lists, less accumulated amortization of
    $7,445 and $5,112, respectively          |  |                        | 7,087   |      |  |   | 9,414   | 
|Non-compete covenants, less accumulated
    amortization of $2,115 and $11,774, respectively  |  |                        | 1,638   |      |  |   | 1,766   | 
|Other intangible assets, less accumulated
    amortization of $3,113 and $1,986, respectively |  |                        | 13,498  |      |  |   | 14,607  | 
|Prepaid pension and other benefit assets                                                      |  |                        | 182,773 |      |  |   | 151,389 | 
|Deferred tax asset                                                                            |  |                        |         |      |  |   | 28,689  | 
|Notes receivable                                                                              |  |                        | 1,186   |      |  |   | 1,991   | 
|Other                                                                                         |  |                        | 4,039   |      |  |   | 4,612   | 
|                                                                                              |  |                        |         |      |  |   |         | 
|                                                                                              |  | $                      | 237,117 |      |  | $ | 239,520 | 
|                                                                                              |  |                        |         |      |  |   |         | 

Intangible assets amortization expenses for the
years ended August 31, 2004, 2003 and 2002 were
$3.8 million, $12.2 million and $4.2 million,
respectively. The estimated amortization expense related to
intangible assets subject to amortization for the next
five years will approximate $2.7 million annually for
the first four years, and $1.7 million for the
fifth year.

Through Country Energy, LLC, formerly a joint
venture with Farmland, the Company marketed refined petroleum
products including gasoline, diesel fuel, propane and lubricants
under the Cenex brand. On November 30, 2001, the Company
purchased the wholesale energy business of Farmland, as well as
all interest in Country Energy, LLC. Based on estimated fair
values, $26.4 million of the purchase price was allocated
to intangible assets, primarily trademarks, tradenames and
non-compete agreements. The intangible assets had a
weighted-average life of approximately 12 years. During the
year ended August 31, 2003, the Company accelerated the
amortization of the non-compete agreement due to Farmlands
July 31, 2003 notification that it intended to liquidate
its assets in bankruptcy. The Company had additional
amortization expense of $7.5 million during 2003 related to
the acceleration, and the asset had a zero book value as of
August 31, 2003.

F-14



---



##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                      
|-- | -------------------------------------
|7. | Notes Payable and
    Long-Term Debt:

Notes payable and long-term debt as of
August 31, 2004 and 2003 consisted of the following:

|                     |                                                                                                                                    |                   |                |                        |  |      |         |         |  |   |         |         | 
|-------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | ----------------- | -------------- | ---------------------- |  | ---- | ------- | ------- |  | - | ------- | ------- | 
|                     |                                                                                                                                    | Interest Rates at |                |                        |  |     
|                     |                                                                                                                                    | August 31, 2004   |                | 2004                   |  | 2003
|                     |                                                                                                                                    |                   |                |                        |  |     
|                     |                                                                                                                                    |                   |                |                       
|                     |                                                                                                                                    |                   |                | (Dollars in thousands)
|Notes payable(a)(h)  |                                                                                                                                    |                   | 2.01% to 2.23% |                        |  | $    | 116,115 |         |  | $ | 251,131 |        
|                     |                                                                                                                                    |                   |                |                        |  |      |         |         |  |   |         |        
|Long-term debt:      |                                                                                                                                    |                   |                |                        |  |      |         |         |  |   |         |        
|                     | Revolving term loans from cooperative and other
    banks, payable in installments through 2009, when the balance is
    due(b)(h) |                   |                | 2.27% to 13.00%        |  |      | $       | 155,784 |  |   | $       | 168,032 | 
|                     | Private placement, payable in equal installments
    beginning in 2008 through 2013(c)(h)                                          |                   |                | 6.81%                  |  |      |         | 225,000 |  |   |         | 225,000 | 
|                     | Private placement, payable in installments
    beginning in 2007 through 2018(d)(h)                                                |                   |                | 4.96% to 5.60%         |  |      |         | 175,000 |  |   |         | 175,000 | 
|                     | Private placement, payable in equal installments
    beginning in 2005 through 2011(e)(h)                                          |                   |                | 7.43% to 7.90%         |  |      |         | 80,000  |  |   |         | 80,000  | 
|                     | Private placement, payable in its entirety in
    2010(f)(h)                                                                       |                   |                | 4.08%                  |  |      |         | 15,000  |  |   |         |         | 
|                     | Private placement, payable in its entirety in
    2011(f)(h)                                                                       |                   |                | 4.39%                  |  |      |         | 15,000  |  |   |         |         | 
|                     | Industrial revenue bonds, payable in its entirety
    in 2011                                                                      |                   |                | 5.23%                  |  |      |         | 3,925   |  |   |         | 5,831   | 
|                     | Other notes and contracts(g)                                                                                                       |                   |                | 5.70% to 12.17%        |  |      |         | 14,109  |  |   |         | 9,310   | 
|                     |                                                                                                                                    |                   |                |                        |  |      |         |         |  |   |         |        
|Total long-term debt |                                                                                                                                    |                   |                |                        |  |      | 683,818 |         |  |   | 663,173 |        
|Less current portion |                                                                                                                                    |                   |                |                        |  |      | 35,117  |         |  |   | 14,951  |        
|                     |                                                                                                                                    |                   |                |                        |  |      |         |         |  |   |         |        
|Long-term portion    |                                                                                                                                    |                   |                |                        |  | $    | 648,701 |         |  | $ | 648,222 |        
|                     |                                                                                                                                    |                   |                |                        |  |      |         |         |  |   |         |        

|                                              |                 |      |  |       |  |  |  |       | 
|--------------------------------------------- | --------------- | ---- |  | ----- |  |  |  | ----- | 
|                                              |                 | 2004 |  | 2003 
|                                              |                 |      |  |      
|Weighted-average interest rates at August 31: |                 |      |  |       |  |  |  |      
|                                              | Short-term debt |      |  | 2.16% |  |  |  | 1.83% | 
|                                              | Long-term debt  |      |  | 6.35% |  |  |  | 6.52% | 



---



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | The Company finances its working capital needs
    through short-term lines of credit with a syndication of
    domestic and international banks. These revolving lines of
    credit include a 364-day facility of $750.0 million,
    and a three-year facility of $150.0 million, both of which
    are committed. On August 31, 2004, $115.0 million was
    outstanding on the 364-day facility. In addition to these
    short-term lines of credit, the Company has a two-year credit
    facility dedicated to NCRA, with a syndication of banks in the
    amount of $15.0 million, all of which is committed, with no
    amounts outstanding on August 31, 2004. Other
    miscellaneous notes payable totaled $1.1 million on
    August 31, 2004.
|   
|(b) |  | The Company established a long-term credit
    agreement, which committed $200.0 million of long-term
    borrowing capacity to the Company through May 31, 1999, of
    which $164.0 million was drawn before the expiration date
    of that commitment. On August 31, 2004, $131.2 million
    was outstanding. NCRA term loans of $12.0 million are
    collateralized by NCRAs investment in CoBank.                                                                                                                                                                                                                                                                                                                                                    

F-15



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |  |                                                                                                                                                                                                                                                         
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(c) |  | In June 1998, the Company entered into a private
    placement with several insurance companies for long-term debt in
    the amount of $225.0 million.                                                                                                 
|   
|(d) |  | In October 2002, the Company entered into a
    private placement with several insurance companies for long-term
    debt in the amount of $175.0 million.                                                                                              
|   
|(e) |  | In January 2001, the Company entered into a note
    purchase and private shelf agreement with Prudential Insurance
    Company. A long-term note was issued for $25.0 million and
    a subsequent note for $55.0 million was issued in March
    2001.
|   
|(f) |  | In March 2004, the Company entered into a note
    purchase and private shelf agreement with Prudential Capital
    Group. In April 2004, two long-term notes were issued for
    $15.0 million each.                                                   
|   
|(g) |  | Other notes payable of $10.0 million are
    collateralized by property, plant and equipment, with a cost of
    approximately $16.9 million, less accumulated depreciation
    of approximately $1.4 million on August 31, 2004.                       
|   
|(h) |  | The debt is unsecured, however restrictive
    covenants under various agreements have requirements for
    maintenance of minimum working capital levels and other
    financial ratios.                                                               

The fair value of long-term debt approximates
book value as of August 31, 2004 and 2003.

The aggregate amount of long-term debt payable as
of August 31, 2004 is as follows:

|           |  |             |         | 
|---------- |  | ----------- | ------- | 
|           |  | (Dollars in
|           |  | thousands) 
|2005       |  | $           | 35,117  | 
|2006       |  |             | 35,582  | 
|2007       |  |             | 60,122  | 
|2008       |  |             | 98,626  | 
|2009       |  |             | 117,285 | 
|Thereafter |  |             | 337,086 | 
|           |  |             |         | 
|           |  | $           | 683,818 | 
|           |  |             |         | 

The Company is in compliance with all debt
covenants and restrictions as of August 31, 2004.

On September 21, 2004, the Company entered
into a private placement with several insurance companies for
long-term debt in the amount of $125.0 million with an
interest rate of 5.25%. The debt will be repaid in equal annual
installments of $25.0 million during fiscal years 2011
through 2015. The proceeds were used to pay down the
Companys short-term debt.



|   |              
|-- | -------------
|8. | Income Taxes:

In October 2001, NCRAs members ratified a
resolution passed by NCRAs Board of Directors to compute
patronage distributions for all years ending after
August 31, 2001, based on earnings for financial statement
purposes, rather than amounts reportable for federal income tax
purposes. As a result of this by-law change, NCRAs
statutory rate applied to the cumulative differences between
financial statement earnings and tax basis earnings, has been
changed. In connection with this change the Company recorded a
deferred tax benefit of $10.9 million as of August 31,
2002. The $10.9 million deferred tax benefit recorded as a
result of the change in patronage distribution by NCRA as of
August 31, 2002, has been offset by a $10.9 million
NCRA valuation allowance. Additional valuation allowances of
$1.7 million and $6.2 million were provided to offset
deferred tax benefits generated by NCRA as of August 31,
2003 and 2002, respectively. For the year ended August 31,
2004, NCRA decreased its valuation allowance by $5.0 million due
to a reduction in NCRAs deferred tax benefits. The Company
recorded a $4.4 million

F-16



---



##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

valuation allowance to offset deferred tax
benefits relating to a capital loss carryforward in that same
period.

The provision for income taxes for the years
ended August 31, 2004, 2003 and 2002 is as follows:

|                    |  |                        |        |      |  |      |        |  |  |   |         |  
|------------------- |  | ---------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------- | -
|                    |  | 2004                   |        | 2003 |  | 2002
|                    |  |                        |        |      |  |     
|                    |  |                       
|                    |  | (Dollars in thousands)
|Current             |  | $                      | 17,200 |      |  | $    | 3,700  |  |  | $ | 14,300  |  
|Deferred            |  |                        | 7,900  |      |  |      | 7,300  |  |  |   | (12,700 | )
|Valuation allowance |  |                        | 600    |      |  |      | 1,700  |  |  |   | 17,100  |  
|                    |  |                        |        |      |  |      |        |  |  |   |         |  
|Income taxes        |  | $                      | 25,700 |      |  | $    | 12,700 |  |  | $ | 18,700  |  
|                    |  |                        |        |      |  |      |        |  |  |   |         |  

The tax effect of temporary differences of
deferred tax assets and liabilities as of August 31, 2004
and 2003 is as follows:

|                                      |                                                          |                        |         |        |  |   |         |        | 
|------------------------------------- | -------------------------------------------------------- | ---------------------- | ------- | ------ |  | - | ------- | ------ | 
|                                      |                                                          | 2004                   |         | 2003  
|                                      |                                                          |                        |         |       
|                                      |                                                          |                       
|                                      |                                                          | (Dollars in thousands)
|Deferred tax assets:                  |                                                          |                        |         |        |  |   |         |       
|                                      | Accrued expenses and valuation reserves                  |                        | $       | 49,151 |  |   | $       | 53,521 | 
|                                      | Postretirement health care and deferred
    compensation |                        |         | 37,067 |  |   |         | 29,153 | 
|                                      | Property, plant and equipment                            |                        |         |        |  |   |         | 9,369  | 
|                                      | Alternative minimum tax credit and loss
    carryforward |                        |         | 28,268 |  |   |         | 8,948  | 
|                                      | Other                                                    |                        |         | 21,464 |  |   |         | 19,316 | 
|                                      |                                                          |                        |         |        |  |   |         |       
|Total deferred tax assets             |                                                          |                        | 135,950 |        |  |   | 120,307 |       
|                                      |                                                          |                        |         |        |  |   |         |       
|Deferred tax liabilities:             |                                                          |                        |         |        |  |   |         |       
|                                      | Pension, including minimum liability                     |                        |         | 47,155 |  |   |         | 34,531 | 
|                                      | Equity method investments                                |                        |         | 7,407  |  |   |         | 23,310 | 
|                                      | Property, plant and equipment                            |                        |         | 35,737 |  |   |         |        | 
|                                      | Other                                                    |                        |         | 1,184  |  |   |         |        | 
|                                      |                                                          |                        |         |        |  |   |         |       
|Total deferred tax liabilities        |                                                          |                        | 91,483  |        |  |   | 57,841  |       
|                                      |                                                          |                        |         |        |  |   |         |       
|Deferred tax assets valuation reserve |                                                          |                        | (11,212 | )      |  |   | (11,765 | )     
|                                      |                                                          |                        |         |        |  |   |         |       
|Net deferred tax assets               |                                                          | $                      | 33,255  |        |  | $ | 50,701  |       
|                                      |                                                          |                        |         |        |  |   |         |       

As of August 31, 2004, net deferred tax
assets of $43.4 million and $10.1 million are included
in current assets and other liabilities, respectively
($22.0 million and $28.7 million in current assets and
other assets, respectively, as of August 31, 2003). As of
August 31, 2004, NCRA recognized a valuation allowance for
the entire tax benefit associated with its net deferred tax
asset, as it is considered more likely than not, based on the
weight of available information, that the future tax benefits
related to these items will not be realized. As of
August 31, 2004, NCRAs net deferred tax assets of
$6.8 million were comprised of deferred tax assets of
$18.4 million and deferred tax liabilities of
$11.6 million. Deferred tax assets are comprised of basis
differences related to inventories, investments, lease
obligations, accrued liabilities and certain federal and state
tax credits. NCRA files a separate tax return and, as such,
these items must be assessed independently of the Companys
deferred tax assets when determining recoverability.

F-17



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The reconciliation of the statutory federal
income tax rates to the effective tax rates for the years ended
August 31, 2004, 2003 and 2002 is as follows:

|                                                                    |  |      |       |      |  |      |       |   |  |  |       |  
|------------------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                                                                    |  | 2004 |       | 2003 |  | 2002
|                                                                    |  |      |       |      |  |     
|Statutory federal income tax rate                                   |  |      | 35.0  | %    |  |      | 35.0  | % |  |  | 35.0  | %
|State and local income taxes, net of federal
    income tax benefit |  |      | 3.9   |      |  |      | 3.9   |   |  |  | 3.9   |  
|Patronage earnings                                                  |  |      | (25.8 | )    |  |      | (25.7 | ) |  |  | (25.0 | )
|Change in patronage determination                                   |  |      |       |      |  |      |       |   |  |  | (7.5  | )
|Export activities at rates other than the U.S.
    statutory rate   |  |      | (4.5  | )    |  |      | (3.2  | ) |  |  | (1.9  | )
|Deferred tax asset valuation allowance                              |  |      | 0.2   |      |  |      | 1.3   |   |  |  | 11.8  |  
|Other                                                               |  |      | 1.6   |      |  |      | (2.0  | ) |  |  | (3.4  | )
|                                                                    |  |      |       |      |  |      |       |   |  |  |       |  
|Effective tax rate                                                  |  |      | 10.4  | %    |  |      | 9.3   | % |  |  | 12.9  | %
|                                                                    |  |      |       |      |  |      |       |   |  |  |       |  



|   |          
|-- | ---------
|9. | Equities:

In accordance with the by-laws and by action of
the Board of Directors, annual net earnings from patronage
sources are distributed to consenting patrons following the
close of each fiscal year, and are based on amounts using
financial statement earnings. The cash portion of the patronage
distribution is determined annually by the Board of Directors,
with the balance issued in the form of capital equity
certificates.

Annual net savings from sources other than
patronage may be added to the unallocated capital reserve or,
upon action by the Board of Directors, allocated to members in
the form of nonpatronage equity certificates. Redemptions are at
the discretion of the Board of Directors.

A new policy was adopted effective
September 1, 2004, whereby redemptions of capital equity
certificates approved by the Board of Directors will be divided
into two pools, one for non-individuals (primarily member
cooperatives) who may participate in an annual pro-rata program
for equities older than 10 years, and another for individual
members who are eligible for equity redemptions at age 72
or upon death. The amount that each non-individual member
receives under the pro-rata program in any year will be
determined by multiplying the dollars available for pro-rata
redemptions, if any that year, as determined by the Board of
Directors, by a fraction, the numerator of which is the amount
of patronage certificates older than 10 years held by that
member, and the denominator is the sum of the patronage
certificates older than 10 years held by all eligible
non-individuals.

For the years ended August 31, 2004, 2003
and 2002, the Company redeemed in cash, patronage related
equities in accordance with authorization from the Board of
Directors in the amounts of $10.3 million,
$31.1 million and $31.1 million, respectively. An
additional $13.0 million of capital equity certificates
were redeemed in fiscal 2004, by issuance of shares of the
Companys 8% Cumulative Redeemable Preferred Stock
(New Preferred) pursuant to a registration statement on
Form S-2 filed with the Securities and Exchange Commission.
The amount of equities redeemed with each share of preferred
stock issued was $27.10, which was the closing price
per share of the stock on the NASDAQ National Market on
March 2, 2004. On August 31, 2004, the Company had
4,226,428 shares of the New Preferred outstanding with a
total redemption value of approximately $105.7 million,
excluding accumulated dividends.

The Company expects cash redemptions related to
the year ended August 31, 2004, to be distributed in fiscal
year 2005, to be approximately $32.1 million and are
classified as a current liability on the August 31, 2004
consolidated balance sheet. The Company expects to redeem an
additional $20.0 million

F-18



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

of capital equity certificates in fiscal year
2005 by issuing shares of the Companys New Preferred,
pending approval from the Securities and Exchange Commission.

In 2001 and 2002 the Company issued 9,454,874
shares of 8% Preferred Stock (Old Preferred). In late 2002, the
Company suspended sales of the Old Preferred, and on
February 25, 2003 the Company filed a post-effective
amendment to terminate the offering of the Old Preferred shares.
In January 2003, the Board of Directors authorized the sale and
issuance of up to 3,500,000 shares of 8% Cumulative Redeemable
Preferred Stock (New Preferred) at a price of $25.00 per share.
The Company filed a registration statement on Form S-2 with
the Securities and Exchange Commission registering 3,000,000
shares of the New Preferred (with an additional over-allotment
option of 450,000 shares granted to the underwriters), which was
declared effective on January 27, 2003. The shares were
subsequently sold for gross proceeds of $86.3 million
(3,450,000 shares). The New Preferred is listed on the NASDAQ
National Market under the symbol CHSCP. Expenses related to the
issuance of the New Preferred were $3.8 million.

On March 5, 2003, the Companys Board
of Directors authorized the redemption and conversion of the Old
Preferred shares. A redemption notification and a conversion
election form were sent to holders of the Old Preferred shares
on March 31, 2003 explaining that on April 25, 2003
all shares of the Old Preferred would be redeemed by the Company
for $1.00 per share unless they were converted into shares
of the Companys New Preferred. The conversion did not
change the base liquidation amount or dividend amount of the Old
Preferred, since 25 shares of the Old Preferred converted
to 1 share of the New Preferred. The total Old Preferred
converted to the New Preferred was 7,452,439 shares, and
the balance of the Old Preferred (2,002,435 shares) was
redeemed in cash at $1.00 per share.

The New Preferred accumulates dividends at a rate
of 8% per year, and dividends are payable quarterly.



|    |                        
|--- | -----------------------
|10. | Employee Benefit Plans:

The Company has various pension and other defined
benefit and defined contribution plans, in which substantially
all employees may participate.

Financial information on changes in benefit
obligation and plan assets funded and balance sheets status as
of August 31, 2004 and 2003 is as follows:

|                                    |                                           |                            |         |                  |   |                |         |         |   |      |        |        |   |   |        |        |   |   |        |        |   |   |        |        |  
|----------------------------------- | ----------------------------------------- | -------------------------- | ------- | ---------------- | - | -------------- | ------- | ------- | - | ---- | ------ | ------ | - | - | ------ | ------ | - | - | ------ | ------ | - | - | ------ | ------ | -
|                                    |                                           |                            |         |                  |   |                |         |         |   |     
|                                    |                                           |                            |         | Non-Qualified    |   |               
|                                    |                                           | Qualified Pension Benefits |         | Pension Benefits |   | Other Benefits
|                                    |                                           |                            |         |                  |   |               
|                                    |                                           | 2004                       |         | 2003             |   | 2004           |         | 2003    |   | 2004 |        | 2003  
|                                    |                                           |                            |         |                  |   |                |         |         |   |      |        |       
|                                    |                                           |                           
|                                    |                                           | (Dollars in thousands)    
|Change in benefit obligation:       |                                           |                            |         |                  |   |                |         |         |   |      |        |        |   |   |        |        |   |   |        |        |   |   |        |       
|                                    | Benefit obligation at beginning of period |                            | $       | 289,906          |   |                | $       | 253,868 |   |      | $      | 13,834 |   |   | $      | 14,543 |   |   | $      | 29,255 |   |   | $      | 24,915 |  
|                                    | Service cost                              |                            |         | 11,548           |   |                |         | 10,840  |   |      |        | 601    |   |   |        | 800    |   |   |        | 754    |   |   |        | 648    |  
|                                    | Interest cost                             |                            |         | 17,203           |   |                |         | 17,503  |   |      |        | 822    |   |   |        | 1,033  |   |   |        | 1,758  |   |   |        | 1,722  |  
|                                    | Plan participants contributions           |                            |         |                  |   |                |         | 1,771   |   |      |        |        |   |   |        |        |   |   |        |        |   |   |        | 215    |  
|                                    | Plan amendments                           |                            |         | 105              |   |                |         |         |   |      |        |        |   |   |        |        |   |   |        | (839   | ) |   |        | 88     |  
|                                    | Transfers                                 |                            |         |                  |   |                |         |         |   |      |        |        |   |   |        |        |   |   |        | 1,206  |   |   |        |        |  
|                                    | Actuarial loss (gain)                     |                            |         | 4,539            |   |                |         | 22,049  |   |      |        | 77     |   |   |        | (766   | ) |   |        | (2,162 | ) |   |        | 2,527  |  
|                                    | Special agreement                         |                            |         |                  |   |                |         |         |   |      |        | 1,003  |   |   |        |        |   |   |        |        |   |   |        |        |  
|                                    | Assumption change                         |                            |         |                  |   |                |         | 4,659   |   |      |        |        |   |   |        |        |   |   |        | 502    |   |   |        | 1,469  |  
|                                    | Benefits paid                             |                            |         | (22,865          | ) |                |         | (20,784 | ) |      |        | (2,211 | ) |   |        | (1,776 | ) |   |        | (2,147 | ) |   |        | (2,329 | )
|                                    |                                           |                            |         |                  |   |                |         |         |   |      |        |        |   |   |        |        |   |   |        |        |   |   |        |       
|Benefit obligation at end of period |                                           | $                          | 300,436 |                  |   | $              | 289,906 |         |   | $    | 14,126 |        |   | $ | 13,834 |        |   | $ | 28,327 |        |   | $ | 29,255 |       
|                                    |                                           |                            |         |                  |   |                |         |         |   |      |        |        |   |   |        |        |   |   |        |        |   |   |        |       

F-19



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                     |                                                      |                            |         |                  |   |                |         |         |   |      |         |         |   |   |         |         |   |   |         |         |   |   |         |         |  
|---------------------------------------------------- | ---------------------------------------------------- | -------------------------- | ------- | ---------------- | - | -------------- | ------- | ------- | - | ---- | ------- | ------- | - | - | ------- | ------- | - | - | ------- | ------- | - | - | ------- | ------- | -
|                                                     |                                                      |                            |         |                  |   |                |         |         |   |     
|                                                     |                                                      |                            |         | Non-Qualified    |   |               
|                                                     |                                                      | Qualified Pension Benefits |         | Pension Benefits |   | Other Benefits
|                                                     |                                                      |                            |         |                  |   |               
|                                                     |                                                      | 2004                       |         | 2003             |   | 2004           |         | 2003    |   | 2004 |         | 2003   
|                                                     |                                                      |                            |         |                  |   |                |         |         |   |      |         |        
|                                                     |                                                      |                           
|                                                     |                                                      | (Dollars in thousands)    
|Change in plan assets:                               |                                                      |                            |         |                  |   |                |         |         |   |      |         |         |   |   |         |         |   |   |         |         |   |   |         |        
|                                                     | Fair value of plan assets at beginning
    of period |                            | $       | 280,217          |   |                | $       | 201,563 |   |      |         |         |   |   |         |         |   |   |         |         |   |   |         |         |  
|                                                     | Actual income on plan assets                         |                            |         | 31,500           |   |                |         | 14,915  |   |      |         |         |   |   |         |         |   |   |         |         |   |   |         |         |  
|                                                     | Company contributions                                |                            |         | 10,700           |   |                |         | 84,523  |   |      | $       | 2,211   |   |   | $       | 1,776   |   |   | $       | 2,147   |   |   | $       | 2,114   |  
|                                                     | Participants contributions                           |                            |         |                  |   |                |         |         |   |      |         |         |   |   |         |         |   |   |         |         |   |   |         | 215     |  
|                                                     | Benefits paid                                        |                            |         | (22,865          | ) |                |         | (20,784 | ) |      |         | (2,211  | ) |   |         | (1,776  | ) |   |         | (2,147  | ) |   |         | (2,329  | )
|                                                     |                                                      |                            |         |                  |   |                |         |         |   |      |         |         |   |   |         |         |   |   |         |         |   |   |         |        
|Fair value of plan assets at end of period           |                                                      | $                          | 299,552 |                  |   | $              | 280,217 |         |   | $    |        |         |   | $ |        |         |   | $ |        |         |   | $ |        |        
|                                                     |                                                      |                            |         |                  |   |                |         |         |   |      |         |         |   |   |         |         |   |   |         |         |   |   |         |        
|Funded status                                        |                                                      | $                          | (884    | )                |   | $              | (9,689  | )       |   | $    | (14,126 | )       |   | $ | (13,834 | )       |   | $ | (28,327 | )       |   | $ | (29,255 | )      
|Employer contributions after measurement date        |                                                      |                            |         |                  |   |                |         |         |   |      | 32      |         |   |   | 84      |         |   |   | 222     |         |   |   | 247     |        
|Unrecognized actuarial loss (gain)                   |                                                      |                            | 114,401 |                  |   |                | 118,025 |         |   |      | 130     |         |   |   | (899    | )       |   |   | (1,061  | )       |   |   | 707     |        
|Unrecognized transition obligation                   |                                                      |                            |         |                  |   |                |         |         |   |      |         |         |   |   |         |         |   |   | 8,325   |         |   |   | 9,261   |        
|Unrecognized prior service cost                      |                                                      |                            | 6,730   |                  |   |                | 7,467   |         |   |      | 2,977   |         |   |   | 3,503   |         |   |   | (1,742  | )       |   |   | (1,076  | )      
|Special agreement                                    |                                                      |                            |         |                  |   |                |         |         |   |      | (1,003  | )       |   |   |         |         |   |   |         |         |   |   |         |        
|                                                     |                                                      |                            |         |                  |   |                |         |         |   |      |         |         |   |   |         |         |   |   |         |         |   |   |         |        
|Prepaid benefit cost (accrued)                       |                                                      | $                          | 120,247 |                  |   | $              | 115,803 |         |   | $    | (11,990 | )       |   | $ | (11,146 | )       |   | $ | (22,583 | )       |   | $ | (20,116 | )      
|                                                     |                                                      |                            |         |                  |   |                |         |         |   |      |         |         |   |   |         |         |   |   |         |         |   |   |         |        
|Amounts recognized on balance sheets
    consist of: |                                                      |                            |         |                  |   |                |         |         |   |      |         |         |   |   |         |         |   |   |         |         |   |   |         |        
|                                                     | Accrued benefit liability                            |                            | $       | 120,247          |   |                | $       | 95,917  |   |      | $       | (11,990 | ) |   | $       | (12,125 | ) |   | $       | (22,583 | ) |   | $       | (20,116 | )
|                                                     | Intangible assets                                    |                            |         |                  |   |                |         | 2,425   |   |      |         |         |   |   |         | 253     |   |   |         |         |   |   |         |         |  
|                                                     | Accumulated other comprehensive loss                 |                            |         |                  |   |                |         | 17,461  |   |      |         |         |   |   |         | 726     |   |   |         |         |   |   |         |         |  
|                                                     |                                                      |                            |         |                  |   |                |         |         |   |      |         |         |   |   |         |         |   |   |         |         |   |   |         |        
|Net amounts recognized                               |                                                      | $                          | 120,247 |                  |   | $              | 115,803 |         |   | $    | (11,990 | )       |   | $ | (11,146 | )       |   | $ | (22,583 | )       |   | $ | (20,116 | )      
|                                                     |                                                      |                            |         |                  |   |                |         |         |   |      |         |         |   |   |         |         |   |   |         |         |   |   |         |        

F-20



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For measurement purposes, a 9.0% annual rate of
increase in the per capita cost of covered health care benefits
was assumed for the year ended August 31, 2004. The rate
was assumed to decrease gradually to 6.0% for 2006 and remain at
that level thereafter. Components of net periodic benefit costs
for the years ended August 31, 2004, 2003 and 2002 are
as follows:

|                                         |                                    |                            |       |                  |   |                |       |         |   |      |       |         |   |      |       |       |  |      |       |       |  |   |       |       |  |   |       |       |   |   |       |       |   |   |       |       |  
|---------------------------------------- | ---------------------------------- | -------------------------- | ----- | ---------------- | - | -------------- | ----- | ------- | - | ---- | ----- | ------- | - | ---- | ----- | ----- |  | ---- | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- | - | - | ----- | ----- | - | - | ----- | ----- | -
|                                         |                                    |                            |       |                  |   |                |       |         |   |      |       |         |   |     
|                                         |                                    |                            |       | Non-Qualified    |   |               
|                                         |                                    | Qualified Pension Benefits |       | Pension Benefits |   | Other Benefits
|                                         |                                    |                            |       |                  |   |               
|                                         |                                    | 2004                       |       | 2003             |   | 2002           |       | 2004    |   | 2003 |       | 2002    |   | 2004 |       | 2003  |  | 2002
|                                         |                                    |                            |       |                  |   |                |       |         |   |      |       |         |   |      |       |       |  |     
|                                         |                                    |                           
|                                         |                                    | (Dollars in thousands)    
|Components of net periodic benefit cost: |                                    |                            |       |                  |   |                |       |         |   |      |       |         |   |      |       |       |  |      |       |       |  |   |       |       |  |   |       |       |   |   |       |       |   |   |       |      
|                                         | Service cost                       |                            | $     | 11,548           |   |                | $     | 10,840  |   |      | $     | 9,275   |   |      | $     | 601   |  |      | $     | 800   |  |   | $     | 1,168 |  |   | $     | 754   |   |   | $     | 648   |   |   | $     | 557   |  
|                                         | Interest cost                      |                            |       | 17,203           |   |                |       | 17,503  |   |      |       | 17,673  |   |      |       | 822   |  |      |       | 1,033 |  |   |       | 886   |  |   |       | 1,758 |   |   |       | 1,722 |   |   |       | 1,586 |  
|                                         | Expected return on assets          |                            |       | (27,489          | ) |                |       | (23,788 | ) |      |       | (21,386 | ) |      |       |       |  |      |       |       |  |   |       |       |  |   |       |       |   |   |       |       |   |   |       |       |  
|                                         | Prior service cost amortization    |                            |       | 843              |   |                |       | 806     |   |      |       | 740     |   |      |       | 526   |  |      |       | 564   |  |   |       | 574   |  |   |       | (174  | ) |   |       | (172  | ) |   |       | (197  | )
|                                         | Actuarial loss (gain) amortization |                            |       | 4,149            |   |                |       | 2,623   |   |      |       | 1,369   |   |      |       | 103   |  |      |       | 159   |  |   |       | 18    |  |   |       | 108   |   |   |       | (215  | ) |   |       | (505  | )
|                                         | Transition amount amortization     |                            |       |                  |   |                |       |         |   |      |       | (708    | ) |      |       |       |  |      |       |       |  |   |       |       |  |   |       | 936   |   |   |       | 936   |   |   |       | 936   |  
|                                         |                                    |                            |       |                  |   |                |       |         |   |      |       |         |   |      |       |       |  |      |       |       |  |   |       |       |  |   |       |       |   |   |       |       |   |   |       |      
|Net periodic benefit cost                |                                    | $                          | 6,254 |                  |   | $              | 7,984 |         |   | $    | 6,963 |         |   | $    | 2,052 |       |  | $    | 2,556 |       |  | $ | 2,646 |       |  | $ | 3,382 |       |   | $ | 2,919 |       |   | $ | 2,377 |      
|                                         |                                    |                            |       |                  |   |                |       |         |   |      |       |         |   |      |       |       |  |      |       |       |  |   |       |       |  |   |       |       |   |   |       |       |   |   |       |      
|Average assumptions:                     |                                    |                            |       |                  |   |                |       |         |   |      |       |         |   |      |       |       |  |      |       |       |  |   |       |       |  |   |       |       |   |   |       |       |   |   |       |      
|                                         | Discount rate                      |                            |       | 6.40%            |   |                |       | 6.30%   |   |      |       | 7.10%   |   |      |       | 6.25% |  |      |       | 6.00% |  |   |       | 7.25% |  |   |       | 6.40% |   |   |       | 6.30% |   |   |       | 7.10% |  
|                                         | Expected return on plan assets     |                            |       | 9.00%            |   |                |       | 9.00%   |   |      |       | 9.00%   |   |      |       | N/A   |  |      |       | N/A   |  |   |       | N/A   |  |   |       | N/A   |   |   |       | N/A   |   |   |       | N/A   |  
|                                         | Rate of compensation increase      |                            |       | 4.30%            |   |                |       | 5.00%   |   |      |       | 5.00%   |   |      |       | 5.00% |  |      |       | 5.00% |  |   |       | 5.00% |  |   |       | 4.30% |   |   |       | 5.00% |   |   |       | 5.00% |  

The aggregate projected benefit obligation,
accumulated benefit obligation and fair value of plan assets for
pension plans with accumulated benefit obligations in excess of
plan assets were as follows as of August 31, 2004
and 2003:

|                               |  |                        |   |                  |  |      |         |      |  |   |        |  |  |   |        | 
|------------------------------ |  | ---------------------- | - | ---------------- |  | ---- | ------- | ---- |  | - | ------ |  |  | - | ------ | 
|                               |  |                        |   |                 
|                               |  | Qualified Pension      |   | Non-Qualified   
|                               |  | Benefits               |   | Pension Benefits
|                               |  |                        |   |                 
|                               |  | 2004                   |   | 2003             |  | 2004 |         | 2003
|                               |  |                        |   |                  |  |      |         |     
|                               |  |                       
|                               |  | (Dollars in thousands)
|Projected benefit obligation   |  | $                      |  |                  |  | $    | 120,068 |      |  | $ | 14,126 |  |  | $ | 13,834 | 
|Accumulated benefit obligation |  |                        |  |                  |  |      | 107,760 |      |  |   | 12,463 |  |  |   | 12,209 | 
|Fair value of plan assets      |  |                        |  |                  |  |      | 104,560 |      |  |   |        |  |  |   |        | 

Assumed health care cost trend rates have a
significant effect on the amounts reported for the health care
plans. A one-percentage point change in the assumed health care
cost trend rates would have the following effects:

|                                                            |  |                        |       |             |  |   |        |  
|----------------------------------------------------------- |  | ---------------------- | ----- | ----------- |  | - | ------ | -
|                                                            |  | 1% Increase            |       | 1% Decrease
|                                                            |  |                        |       |            
|                                                            |  |                       
|                                                            |  | (Dollars in thousands)
|Effect on total of service and interest cost
    components |  | $                      | 254   |             |  | $ | (229   | )
|Effect on postretirement benefit obligation                 |  |                        | 2,418 |             |  |   | (2,190 | )

The Company provides defined life insurance and
health care benefits for certain retired employees. The plan is
contributory based on years of service and family status, with
retiree contributions adjusted annually.

The Company has other contributory defined
contribution plans covering substantially all employees. Total
contributions by the Company to these plans were;
$8.6 million, $8.5 million and $11.0 million, for
the years ended August 31, 2004, 2003 and
2002, respectively.

F-21



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company contributed $10.7 million to
qualified pension plans in 2004. Because the plan is fully
funded, the Company does not expect to contribute to the pension
plans in 2005. The Company expects to pay $2.3 million to
participants of the non-qualified pension and postretirement
benefit plans during 2005.

The Companys retiree benefit payments which
reflect expected future service are anticipated to be paid
as follows:

|          |  |                        |         |                  |  |          |       |  |  |   |        | 
|--------- |  | ---------------------- | ------- | ---------------- |  | -------- | ----- |  |  | - | ------ | 
|          |  | Qualified              |         | Non-Qualified    |  | Other   
|          |  | Pension Benefits       |         | Pension Benefits |  | Benefits
|          |  |                        |         |                  |  |         
|          |  |                       
|          |  | (Dollars in thousands)
|2005      |  | $                      | 30,586  |                  |  | $        | 241   |  |  | $ | 2,166  | 
|2006      |  |                        | 22,738  |                  |  |          | 240   |  |  |   | 2,278  | 
|2007      |  |                        | 26,394  |                  |  |          | 244   |  |  |   | 2,658  | 
|2008      |  |                        | 24,977  |                  |  |          | 237   |  |  |   | 2,882  | 
|2009      |  |                        | 26,950  |                  |  |          | 235   |  |  |   | 3,298  | 
|2010-2014 |  |                        | 150,883 |                  |  |          | 1,134 |  |  |   | 23,716 | 

The Company has master trusts that hold the
assets for the cash balance, production and NCRA pension plans.
The Company and NCRA have qualified plan committees that set
investment guidelines with the assistance of an external
consultant. Investment objectives for the Companys plan
assets are to:



| |   |                                                                                           
| | - | ------------------------------------------------------------------------------------------
| |  | Optimize the long-term returns on plan assets at
    an acceptable level of risk, and     
|
| |  | Maintain broad diversification across asset
    classes and among investment managers, and
|
| |  | Focus on long-term return objectives.                                                     

Asset allocation targets promote optimal expected
return and volatility characteristics given the long-term time
horizon for fulfilling the obligations of the pension plans. An
annual analysis on the risk versus the return of the investment
portfolio is conducted to justify the expected long-term rate of
return assumption. The Company generally uses long-term
historical return information for the targeted asset mix
identified in asset and liability studies. Adjustments are made
to the expected long-term rate of return assumption when deemed
necessary based upon revised expectations of future investment
performance of the overall investment markets.

The investment portfolio contains a diversified
portfolio of investment categories, including domestic and
international equities, fixed income securities and real estate.
Securities are also diversified in terms of domestic and
international securities, short and long-term securities, growth
and value equities, large and small cap stocks, as well as
active and passive management styles.

The Committee believes with prudent risk
tolerance and asset diversification, the plan should be able to
meet its pension obligations in the future.

The Companys pension plans average
asset allocations by asset categories are as follows:

|            |  |      |        |      |  |  |        | 
|----------- |  | ---- | ------ | ---- |  |  | ------ | 
|            |  | 2004 |        | 2003
|            |  |      |        |     
|Cash        |  |      | 2.7%   |      |  |  | 1.8%   | 
|Debt        |  |      | 29.9%  |      |  |  | 29.5%  | 
|Equities    |  |      | 62.0%  |      |  |  | 63.2%  | 
|Real estate |  |      | 3.8%   |      |  |  | 3.8%   | 
|Other       |  |      | 1.6%   |      |  |  | 1.7%   | 
|            |  |      |        |      |  |  |        | 
|Total       |  |      | 100.0% |      |  |  | 100.0% | 
|            |  |      |        |      |  |  |        | 

F-22



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

11.     Segment
Reporting:

The Company operates five business segments,
which are based on products and services; Agronomy, Energy,
Country Operations and Services, Grain Marketing, and Processed
Grains and Foods. The Agronomy segment consists of joint
ventures and other investments, from which the Company derives
investment income based upon the profitability of these
investments. The Energy segment derives its revenues through
refining, wholesaling and retailing of petroleum products. The
Country Operations and Services segment derives its revenues
through the origination and marketing of grain, through the
retail sales of petroleum and agronomy products, and processed
sunflowers, feed and farm supplies. The Country Operations and
Services segment also derives revenues from service activities
related to crop production. The Grain Marketing segment derives
its revenues from the sale of grains and oilseeds and from
service activities conducted at its export terminals. The
Processed Grains and Foods segment derives its revenues from the
sales of soybean meal and soybean refined oil, from equity
income in two wheat milling joint ventures, from equity income
in an oilseed food manufacturing and distribution joint venture,
and from the sales of Mexican food products.

Reconciling Amounts represent the elimination of
sales between segments. Such transactions are conducted at
market prices to more accurately evaluate the profitability of
the individual business segments.

The Company assigns certain corporate general and
administrative expenses to its business segments, based on use
of such services and allocates other services based on factors
or considerations relevant to the costs incurred.

Expenses that are incurred at the corporate level
for the purpose of the general operation of the Company are
allocated to the segments based upon factors which management
considers to be non-asymmetrical. Nevertheless, due to
efficiencies in scale, cost allocations, and intersegment
activity, management does not represent that these segments, if
operated independently, would report the income before income
taxes and other financial information as presented.

F-23



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Segment information for the years ended
August 31, 2004, 2003 and 2002 is as follows:

|                                             |  |                        |         |        |  |            |           |           |  |           |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |            |   |  |   |            |  
|-------------------------------------------- |  | ---------------------- | ------- | ------ |  | ---------- | --------- | --------- |  | --------- | --------- | --------- |  | ----------- | --------- | ----- |  | - | ------- | - |  | - | ------- | - |  | - | ---------- | - |  | - | ---------- | -
|                                             |  |                        |         |        |  | Country    |           |           |  | Processed |           |           |  |             |           |      
|                                             |  |                        |         |        |  | Operations |           |           |  | Grains    |           | Corporate |  |             |           |      
|                                             |  |                        |         |        |  | and        |           | Grain     |  | and       |           | and       |  | Reconciling |           |      
|                                             |  | Agronomy               |         | Energy |  | Services   |           | Marketing |  | Foods     |           | Other     |  | Amounts     |           | Total
|                                             |  |                        |         |        |  |            |           |           |  |           |           |           |  |             |           |      
|                                             |  |                       
|                                             |  | (Dollars in thousands)
|For the year ended August 31, 2004:          |  |                        |         |        |  |            |           |           |  |           |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |            |   |  |   |            |  
|Net sales                                    |  |                        |         |        |  | $          | 4,028,248 |           |  | $         | 2,227,764 |           |  | $           | 5,006,029 |       |  | $ | 802,102 |   |  |   |         |   |  | $ | (1,154,810 | ) |  | $ | 10,909,333 |  
|Other revenues                               |  | $                      | (15     | )      |  |            | 9,193     |           |  |           | 94,381    |           |  |             | 28,710    |       |  |   | 2,836   |   |  | $ | 6,198   |   |  |   |            |   |  |   | 141,303    |  
|                                             |  |                        |         |        |  |            |           |           |  |           |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |            |   |  |   |            |  
|                                             |  |                        | (15     | )      |  |            | 4,037,441 |           |  |           | 2,322,145 |           |  |             | 5,034,739 |       |  |   | 804,938 |   |  |   | 6,198   |   |  |   | (1,154,810 | ) |  |   | 11,050,636 |  
|Cost of goods sold                           |  |                        |         |        |  |            | 3,784,260 |           |  |           | 2,199,700 |           |  |             | 5,006,704 |       |  |   | 768,391 |   |  |   |         |   |  |   | (1,154,810 | ) |  |   | 10,604,245 |  
|Marketing, general and administrative        |  |                        | 8,482   |        |  |            | 66,493    |           |  |           | 70,196    |           |  |             | 25,071    |       |  |   | 31,811  |   |  |   | 6,231   |   |  |   |            |   |  |   | 208,284    |  
|                                             |  |                        |         |        |  |            |           |           |  |           |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |            |   |  |   |            |  
|Operating (losses) earnings                  |  |                        | (8,497  | )      |  |            | 186,688   |           |  |           | 52,249    |           |  |             | 2,964     |       |  |   | 4,736   |   |  |   | (33     | ) |  |   |           |   |  |   | 238,107    |  
|Gain on sale of investment                   |  |                        |         |        |  |            | (14,666   | )         |  |           |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |            |   |  |   | (14,666    | )
|Gain on legal settlements                    |  |                        |         |        |  |            |           |           |  |           | (692      | )         |  |             |           |       |  |   |         |   |  |   |         |   |  |   |            |   |  |   | (692       | )
|Interest                                     |  |                        | (352    | )      |  |            | 13,819    |           |  |           | 16,019    |           |  |             | 5,874     |       |  |   | 15,307  |   |  |   | 958     |   |  |   |            |   |  |   | 51,625     |  
|Equity (income) from investments             |  |                        | (35,725 | )      |  |            | (1,399    | )         |  |           | (519      | )         |  |             | (11,413   | )     |  |   | (29,966 | ) |  |   |         |   |  |   |            |   |  |   | (79,022    | )
|Minority interests                           |  |                        |         |        |  |            | 32,507    |           |  |           | 1,323     |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |            |   |  |   | 33,830     |  
|                                             |  |                        |         |        |  |            |           |           |  |           |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |            |   |  |   |            |  
|Income (loss) before income taxes            |  | $                      | 27,580  |        |  | $          | 156,427   |           |  | $         | 36,118    |           |  | $           | 8,503     |       |  | $ | 19,395  |   |  | $ | (991    | ) |  | $ |           |   |  | $ | 247,032    |  
|                                             |  |                        |         |        |  |            |           |           |  |           |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |            |   |  |   |            |  
|Intersegment sales                           |  |                        |         |        |  | $          | (121,199  | )         |  | $         | (987,145  | )         |  | $           | (45,103   | )     |  | $ | (1,363  | ) |  |   |         |   |  | $ | 1,154,810  |   |  | $ |           |  
|                                             |  |                        |         |        |  |            |           |           |  |           |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |            |   |  |   |            |  
|Goodwill                                     |  |                        |         |        |  | $          | 3,041     |           |  | $         | 250       |           |  |             |           |       |  | $ | 23,605  |   |  |   |         |   |  |   |            |   |  | $ | 26,896     |  
|                                             |  |                        |         |        |  |            |           |           |  |           |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |            |   |  |   |            |  
|Capital expenditures                         |  |                        |         |        |  | $          | 187,937   |           |  | $         | 28,537    |           |  | $           | 6,835     |       |  | $ | 18,783  |   |  | $ | 3,056   |   |  |   |            |   |  | $ | 245,148    |  
|                                             |  |                        |         |        |  |            |           |           |  |           |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |            |   |  |   |            |  
|Depreciation and amortization                |  | $                      | 1,247   |        |  | $          | 57,195    |           |  | $         | 22,087    |           |  | $           | 8,040     |       |  | $ | 15,789  |   |  | $ | 4,041   |   |  |   |            |   |  | $ | 108,399    |  
|                                             |  |                        |         |        |  |            |           |           |  |           |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |            |   |  |   |            |  
|Total identifiable assets at August 31, 2004 |  | $                      | 327,448 |        |  | $          | 1,591,254 |           |  | $         | 862,645   |           |  | $           | 487,807   |       |  | $ | 475,004 |   |  | $ | 287,134 |   |  |   |            |   |  | $ | 4,031,292  |  
|                                             |  |                        |         |        |  |            |           |           |  |           |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |            |   |  |   |            |  

F-24



---



##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                             |  |                        |         |        |  |            |           |           |  |           |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|-------------------------------------------- |  | ---------------------- | ------- | ------ |  | ---------- | --------- | --------- |  | --------- | --------- | --------- |  | ----------- | --------- | ----- |  | - | ------- | - |  | - | ------- | - |  | - | -------- | - |  | - | --------- | -
|                                             |  |                        |         |        |  | Country    |           |           |  | Processed |           |           |  |             |           |      
|                                             |  |                        |         |        |  | Operations |           |           |  | Grains    |           | Corporate |  |             |           |      
|                                             |  |                        |         |        |  | and        |           | Grain     |  | and       |           | and       |  | Reconciling |           |      
|                                             |  | Agronomy               |         | Energy |  | Services   |           | Marketing |  | Foods     |           | Other     |  | Amounts     |           | Total
|                                             |  |                        |         |        |  |            |           |           |  |           |           |           |  |             |           |      
|                                             |  |                       
|                                             |  | (Dollars in thousands)
|For the year ended August 31, 2003:          |  |                        |         |        |  |            |           |           |  |           |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Net sales                                    |  |                        |         |        |  | $          | 3,648,093 |           |  | $         | 1,885,825 |           |  | $           | 4,139,226 |       |  | $ | 491,931 |   |  |   |         |   |  | $ | (894,341 | ) |  | $ | 9,270,734 |  
|Other revenues                               |  | $                      | (84     | )      |  |            | 5,655     |           |  |           | 84,206    |           |  |             | 25,676    |       |  |   | 2,411   |   |  | $ | 4,714   |   |  |   |          |   |  |   | 122,578   |  
|                                             |  |                        |         |        |  |            |           |           |  |           |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|                                             |  |                        | (84     | )      |  |            | 3,653,748 |           |  |           | 1,970,031 |           |  |             | 4,164,902 |       |  |   | 494,342 |   |  |   | 4,714   |   |  |   | (894,341 | ) |  |   | 9,393,312 |  
|Cost of goods sold                           |  |                        |         |        |  |            | 3,470,726 |           |  |           | 1,876,811 |           |  |             | 4,133,677 |       |  |   | 473,682 |   |  |   |         |   |  |   | (894,341 | ) |  |   | 9,060,555 |  
|Marketing, general and administrative        |  |                        | 8,138   |        |  |            | 63,740    |           |  |           | 55,887    |           |  |             | 21,072    |       |  |   | 29,715  |   |  |   | 5,205   |   |  |   |          |   |  |   | 183,757   |  
|                                             |  |                        |         |        |  |            |           |           |  |           |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Operating (losses) earnings                  |  |                        | (8,222  | )      |  |            | 119,282   |           |  |           | 37,333    |           |  |             | 10,153    |       |  |   | (9,055  | ) |  |   | (491    | ) |  |   |         |   |  |   | 149,000   |  
|Gain on legal settlements                    |  |                        |         |        |  |            |           |           |  |           | (10,867   | )         |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   | (10,867   | )
|Interest                                     |  |                        | (974    | )      |  |            | 16,401    |           |  |           | 14,975    |           |  |             | 4,738     |       |  |   | 12,845  |   |  |   | 690     |   |  |   |          |   |  |   | 48,675    |  
|Equity (income) loss from investments        |  |                        | (20,773 | )      |  |            | (1,353    | )         |  |           | (788      | )         |  |             | 1,673     |       |  |   | (26,056 | ) |  |   | (2      | ) |  |   |          |   |  |   | (47,299   | )
|Minority interests                           |  |                        |         |        |  |            | 20,782    |           |  |           | 1,168     |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   | 21,950    |  
|                                             |  |                        |         |        |  |            |           |           |  |           |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Income (loss) before income taxes            |  | $                      | 13,525  |        |  | $          | 83,452    |           |  | $         | 32,845    |           |  | $           | 3,742     |       |  | $ | 4,156   |   |  | $ | (1,179  | ) |  | $ |         |   |  | $ | 136,541   |  
|                                             |  |                        |         |        |  |            |           |           |  |           |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Intersegment sales                           |  |                        |         |        |  | $          | (94,209   | )         |  | $         | (796,999  | )         |  | $           | (2,435    | )     |  | $ | (698    | ) |  |   |         |   |  | $ | 894,341  |   |  | $ |          |  
|                                             |  |                        |         |        |  |            |           |           |  |           |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Goodwill                                     |  |                        |         |        |  | $          | 3,185     |           |  | $         | 262       |           |  |             |           |       |  | $ | 23,605  |   |  |   |         |   |  |   |          |   |  | $ | 27,052    |  
|                                             |  |                        |         |        |  |            |           |           |  |           |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Capital expenditures                         |  |                        |         |        |  | $          | 80,837    |           |  | $         | 26,738    |           |  | $           | 5,298     |       |  | $ | 60,576  |   |  | $ | 2,240   |   |  |   |          |   |  | $ | 175,689   |  
|                                             |  |                        |         |        |  |            |           |           |  |           |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Depreciation and amortization                |  | $                      | 1,247   |        |  | $          | 65,868    |           |  | $         | 21,039    |           |  | $           | 6,718     |       |  | $ | 13,321  |   |  | $ | 3,154   |   |  |   |          |   |  | $ | 111,347   |  
|                                             |  |                        |         |        |  |            |           |           |  |           |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Total identifiable assets at August 31, 2003 |  | $                      | 285,906 |        |  | $          | 1,449,652 |           |  | $         | 857,523   |           |  | $           | 450,415   |       |  | $ | 498,872 |   |  | $ | 265,600 |   |  |   |          |   |  | $ | 3,807,968 |  
|                                             |  |                        |         |        |  |            |           |           |  |           |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|For the year ended August 31, 2002:          |  |                        |         |        |  |            |           |           |  |           |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Net sales                                    |  |                        |         |        |  | $          | 2,657,689 |           |  | $         | 1,474,553 |           |  | $           | 3,281,469 |       |  | $ | 496,084 |   |  |   |         |   |  | $ | (753,341 | ) |  | $ | 7,156,454 |  
|Other revenues                               |  | $                      | (89     | )      |  |            | 857       |           |  |           | 83,361    |           |  |             | 22,399    |       |  |   | (1,209  | ) |  | $ | 2,032   |   |  |   |          |   |  |   | 107,351   |  
|                                             |  |                        |         |        |  |            |           |           |  |           |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|                                             |  |                        | (89     | )      |  |            | 2,658,546 |           |  |           | 1,557,914 |           |  |             | 3,303,868 |       |  |   | 494,875 |   |  |   | 2,032   |   |  |   | (753,341 | ) |  |   | 7,263,805 |  
|Cost of goods sold                           |  |                        |         |        |  |            | 2,483,359 |           |  |           | 1,474,392 |           |  |             | 3,272,985 |       |  |   | 462,655 |   |  |   |         |   |  |   | (753,341 | ) |  |   | 6,940,050 |  
|Marketing, general and administrative        |  |                        | 8,957   |        |  |            | 66,731    |           |  |           | 47,995    |           |  |             | 22,213    |       |  |   | 31,813  |   |  |   | 4,466   |   |  |   |          |   |  |   | 182,175   |  
|                                             |  |                        |         |        |  |            |           |           |  |           |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Operating (losses) earnings                  |  |                        | (9,046  | )      |  |            | 108,456   |           |  |           | 35,527    |           |  |             | 8,670     |       |  |   | 407     |   |  |   | (2,434  | ) |  |   |         |   |  |   | 141,580   |  
|Gain on legal settlements                    |  |                        |         |        |  |            |           |           |  |           | (2,970    | )         |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   | (2,970    | )
|Interest                                     |  |                        | (1,403  | )      |  |            | 16,875    |           |  |           | 13,851    |           |  |             | 4,807     |       |  |   | 9,514   |   |  |   | (1,189  | ) |  |   |          |   |  |   | 42,455    |  
|Equity (income) loss from investments        |  |                        | (13,425 | )      |  |            | 1,166     |           |  |           | (283      | )         |  |             | (4,257    | )     |  |   | (41,331 | ) |  |   | (3      | ) |  |   |          |   |  |   | (58,133   | )
|Minority interests                           |  |                        |         |        |  |            | 14,604    |           |  |           | 786       |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   | 15,390    |  
|                                             |  |                        |         |        |  |            |           |           |  |           |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Income (loss) before income taxes            |  | $                      | 5,782   |        |  | $          | 75,811    |           |  | $         | 24,143    |           |  | $           | 8,120     |       |  | $ | 32,224  |   |  | $ | (1,242  | ) |  | $ |         |   |  | $ | 144,838   |  
|                                             |  |                        |         |        |  |            |           |           |  |           |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Intersegment sales                           |  |                        |         |        |  | $          | (67,367   | )         |  | $         | (615,853  | )         |  | $           | (69,561   | )     |  | $ | (560    | ) |  |   |         |   |  | $ | 753,341  |   |  | $ |          |  
|                                             |  |                        |         |        |  |            |           |           |  |           |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Capital expenditures                         |  |                        |         |        |  | $          | 54,576    |           |  | $         | 34,305    |           |  | $           | 14,851    |       |  | $ | 35,144  |   |  | $ | 1,293   |   |  |   |          |   |  | $ | 140,169   |  
|                                             |  |                        |         |        |  |            |           |           |  |           |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  
|Depreciation and amortization                |  | $                      | 1,247   |        |  | $          | 58,701    |           |  | $         | 21,214    |           |  | $           | 6,235     |       |  | $ | 13,436  |   |  | $ | 3,153   |   |  |   |          |   |  | $ | 103,986   |  
|                                             |  |                        |         |        |  |            |           |           |  |           |           |           |  |             |           |       |  |   |         |   |  |   |         |   |  |   |          |   |  |   |           |  

During the years ended August 31, 2004, 2003
and 2002, the Company received cash proceeds and recorded gains
of $0.7 million, $10.9 million and $3.0 million,
respectively, related to legal settlements from several vitamin
product suppliers against whom the Company alleged certain
price-fixing claims.

F-25



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                               
|--- | ------------------------------
|12. | Commitments and Contingencies:



| |               
| | --------------
| | Environmental:

The Company is required to comply with various
environmental laws and regulations incidental to its normal
business operations. In order to meet its compliance
requirements, the Company establishes reserves for the probable
future costs of remediation of identified issues, which are
included in cost of goods sold and marketing, general and
administrative expenses in the consolidated statements of
operations. The resolution of any such matters may affect
consolidated net income for any fiscal period; however,
management believes any resulting liabilities, individually or
in the aggregate, will not have a material effect on the
consolidated financial position, results of operations or cash
flows of the Company during any fiscal year.

In connection with certain refinery upgrades and
enhancements that are necessary in order to comply with existing
environmental regulations, the Company expects to incur
additional capital expenditures of approximately
$87.0 million for the Companys Laurel, Montana,
refinery and $311.0 million for NCRAs McPherson,
Kansas, refinery, of which $49.2 million has been spent at
the Laurel refinery and $131.0 million has been spent by
NCRA at the McPherson refinery as of August 31, 2004. The
Company expects all of these compliance capital expenditures at
the refineries to be completed by December 31, 2005, and
anticipates funding these projects with a combination of cash
flows from operations and debt proceeds.



| |                                 
| | --------------------------------
| | Other Litigation
    and Claims:

The Company is involved as a defendant in various
lawsuits, claims and disputes, which are in the normal course of
the Companys business. The resolution of any such matters
may affect consolidated net income for any fiscal period;
however, management believes any resulting liabilities,
individually or in the aggregate, will not have a material
effect on the consolidated financial position, results of
operations or cash flows of the Company during any fiscal year.



| |               
| | --------------
| | Grain Storage:

As of August 31, 2004 and 2003, the Company
stored grain and processed grain products for third parties
totaling $157.1 million and $155.2 million,
respectively. Such stored commodities and products are not the
property of the Company and therefore are not included in the
Companys inventories.



| |            
| | -----------
| | Guarantees:

The Company is a guarantor for lines of credit
for related companies of which $32.0 million was
outstanding as of August 31, 2004. The Companys bank
covenants allow maximum guarantees of $150.0 million. In
addition, the Companys bank covenants allow for guarantees
dedicated solely for NCRA in the amount of $125.0 million.
All outstanding loans with respective creditors are current as
of August 31, 2004.

The Company has adopted FASB Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, which requires disclosures to be
made by a guarantor in its interim and annual financial
statements about its obligations under guarantees. The
interpretation also clarifies the requirements related to the
recognition of a liability by a guarantor at the inception of
the guarantee for obligations the guarantor has undertaken in
issuing the guarantee.

The Company makes seasonal and term loans to
member cooperatives, and its wholly-owned subsidiary, Fin-Ag,
Inc., makes loans for agricultural purposes to individual
producers. Some of these loans

F-26



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

are sold to CoBank, and the Company guarantees a
portion of the loans sold. In addition, the Company also
guarantees certain debt and obligations under contracts for its
subsidiaries and members.

The Companys obligations pursuant to its
guarantees as of August 31, 2004 are as follows:

|                                                                      |  |                        |        |             |  |           |        |                 |  |                                                                                                                                                                                                                                     |  |                                                                                                                  |  |                                             |  |                                          |  |                                                                                                                |  | 
|--------------------------------------------------------------------- |  | ---------------------- | ------ | ----------- |  | --------- | ------ | --------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------- |  | ---------------------------------------- |  | -------------------------------------------------------------------------------------------------------------- |  | 
|                                                                      |  | Guarantee/             |        | Exposure on |  |           |        |                 |  |                                                                                                                                                                                                                                     |  |                                                                                                                  |  |                                            
|                                                                      |  | Maximum                |        | August 31,  |  | Nature of |        |                 |  | Triggering                                                                                                                                                                                                                          |  |                                                                                                                  |  | Assets Held                                
|Entities                                                              |  | Exposure               |        | 2004        |  | Guarantee |        | Expiration Date |  | Event                                                                                                                                                                                                                               |  | Recourse Provisions                                                                                              |  | as Collateral                              
|                                                                      |  |                        |        |             |  |           |        |                 |  |                                                                                                                                                                                                                                     |  |                                                                                                                  |  |                                            
|                                                                      |  |                        |        |             |  |           |        |                 |  |                                                                                                                                                                                                                                     |  |                                                                                                                 
|                                                                      |  | (Dollars in thousands) |        |             |  |           |        |                 |  |                                                                                                                                                                                                                                     |  |                                                                                                                 
|The Companys financial services cooperative
    loans sold to CoBank |  |                        | *      |             |  | $         | 5,927  |                 |  | 10% of the obligations of borrowers (agricultural
    cooperatives) under credit agreements for loans sold                                                                                                                          |  | None stated, but may be terminated by either
    party upon 60 days prior notice in regard to future obligations |  | Credit agreement default                    |  | Subrogation against borrower             |  | Some or all assets of borrower are held as
    collateral and should be sufficient to cover guarantee exposure
|Fin-Ag, Inc. agricultural loans sold to CoBank                        |  |                        | *      |             |  |           | 25,076 |                 |  | 15% of the obligations of borrowers under credit
    agreements for some of the loans sold, 50% of the obligations of
    borrowers for other loans sold, and 100% of the obligations of
    borrowers for the remaining loans sold |  | None stated, but may be terminated by either
    party upon 90 days prior notice in regard to future obligations |  | Credit agreement default                    |  | Subrogation against borrower             |  | Some or all assets of borrower are held as
    collateral and should be sufficient to cover guarantee exposure
|Horizon Milling, LLC                                                  |  | $                      | 5,000  |             |  |           |        |                 |  | Indemnification and reimbursement of 24% of
    damages related to Horizon Milling, LLCs performance under
    a flour sales agreement                                                                                             |  | None stated, but may be terminated by any party
    upon 90 days prior notice in regard to future obligations    |  | Non- performance under flour sale agreement |  | Subrogation against Horizon Milling, LLC |  | None                                                                                                          
|TEMCO, LLC                                                            |  | $                      | 15,000 |             |  |           |        |                 |  | Obligations by TEMCO, LLC under credit agreement                                                                                                                                                                                    |  | None stated                                                                                                      |  | Credit agreement default                    |  | Subrogation against TEMCO, LLC           |  | None                                                                                                          

F-27



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|              |  |                        |   |             |  |           |        |                 |  |                                                                                                                                               |  |                                                                                                                                                                                            |  |               |            |  |  |                                |  |                                                                                                                      
|------------- |  | ---------------------- | - | ----------- |  | --------- | ------ | --------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | ---------- |  |  | ------------------------------ |  | ---------------------------------------------------------------------------------------------------------------------
|              |  | Guarantee/             |   | Exposure on |  |           |        |                 |  |                                                                                                                                               |  |                                                                                                                                                                                            |  |              
|              |  | Maximum                |   | August 31,  |  | Nature of |        |                 |  | Triggering                                                                                                                                    |  |                                                                                                                                                                                            |  | Assets Held  
|Entities      |  | Exposure               |   | 2004        |  | Guarantee |        | Expiration Date |  | Event                                                                                                                                         |  | Recourse Provisions                                                                                                                                                                        |  | as Collateral
|              |  |                        |   |             |  |           |        |                 |  |                                                                                                                                               |  |                                                                                                                                                                                            |  |              
|              |  |                        |   |             |  |           |        |                 |  |                                                                                                                                               |  |                                                                                                                                                                                           
|              |  | (Dollars in thousands) |   |             |  |           |        |                 |  |                                                                                                                                               |  |                                                                                                                                                                                           
|Third parties |  |                        | * |             |  |           | 1,000  |                 |  | Surety for, or indemnification of surety for
    sales contracts between affiliates and sellers of grain under
    deferred payment contracts |  | Annual renewal on December 1st in regard to
    surety for one third party, otherwise none stated and may be
    terminated by the Company at any time in regard to future
    obligations |  |               | Nonpayment |  |  | Subrogation against affiliates |  | Some or all assets of borrower are held as
    collateral but might not be sufficient to cover guarantee
    exposure
|              |  |                        |   |             |  |           |        |                 |  |                                                                                                                                               |  |                                                                                                                                                                                            |  |               |            |  |  |                                |  |                                                                                                                      
|              |  |                        |   |             |  | $         | 32,003 |                 |  |                                                                                                                                               |  |                                                                                                                                                                                            |  |               |            |  |  |                                |  |                                                                                                                      
|              |  |                        |   |             |  |           |        |                 |  |                                                                                                                                               |  |                                                                                                                                                                                            |  |               |            |  |  |                                |  |                                                                                                                      



---



|  |                                                                                                                                                                                                                                                                 
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | The Companys bank covenants allow for
    guarantees of up to $150.0 million, but the Company is under no
    obligation to extend these guarantees. The maximum exposure on
    any given date is equal to the actual guarantees extended as of
    that date.



| |                   
| | ------------------
| | Lease Commitments:

The Company leases approximately 1,900 rail
cars with remaining lease terms of one to ten years. In
addition, the Company has commitments under other operating
leases for various refinery, manufacturing and transportation
equipment, vehicles and office space. Some leases include
purchase options at not less than fair market value at the end
of the leases term.

Total rental expense for all operating leases,
net of rail car mileage credits received from the railroad and
sublease income was $35.3 million, $31.7 million and
$30.7 million for the years ended August 31, 2004,
2003 and 2002, respectively. Mileage credits and sublease income
totaled $7.2 million, $7.1 million and
$9.5 million for the years ended August 31, 2004, 2003
and 2002, respectively.

Minimum future lease payments, required under
noncancellable operating leases as of August 31, 2004 are
as follows:

|                                    |  |                        |        |          |  |           |        |       |  |   |        |  |  |   |         | 
|----------------------------------- |  | ---------------------- | ------ | -------- |  | --------- | ------ | ----- |  | - | ------ |  |  | - | ------- | 
|                                    |  | Rail                   |        |          |  | Equipment |        |      
|                                    |  | Cars                   |        | Vehicles |  | and Other |        | Total
|                                    |  |                        |        |          |  |           |        |      
|                                    |  |                       
|                                    |  | (Dollars in thousands)
|2005                                |  | $                      | 8,539  |          |  | $         | 16,207 |       |  | $ | 5,676  |  |  | $ | 30,422  | 
|2006                                |  |                        | 6,090  |          |  |           | 13,233 |       |  |   | 5,180  |  |  |   | 24,503  | 
|2007                                |  |                        | 5,034  |          |  |           | 10,392 |       |  |   | 4,589  |  |  |   | 20,015  | 
|2008                                |  |                        | 4,179  |          |  |           | 9,133  |       |  |   | 3,241  |  |  |   | 16,553  | 
|2009                                |  |                        | 3,036  |          |  |           | 6,110  |       |  |   | 2,906  |  |  |   | 12,052  | 
|Thereafter                          |  |                        | 9,151  |          |  |           | 5,511  |       |  |   | 4,588  |  |  |   | 19,250  | 
|                                    |  |                        |        |          |  |           |        |       |  |   |        |  |  |   |         | 
|Total minimum future lease payments |  | $                      | 36,029 |          |  | $         | 60,586 |       |  | $ | 26,180 |  |  | $ | 122,795 | 
|                                    |  |                        |        |          |  |           |        |       |  |   |        |  |  |   |         | 

F-28



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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                                  
|--- | -------------------------------------------------
|13. | Supplemental Cash Flow and Other
    Information:

Additional information concerning supplemental
disclosures of cash flow activities for the years ended
August 31, 2004, 2003 and 2002 is as follows:

|                                        |                                                                            |                        |   |         |   |      |   |         |   |  |   |         |  
|--------------------------------------- | -------------------------------------------------------------------------- | ---------------------- | - | ------- | - | ---- | - | ------- | - |  | - | ------- | -
|                                        |                                                                            | 2004                   |   | 2003    |   | 2002
|                                        |                                                                            |                        |   |         |   |     
|                                        |                                                                            |                       
|                                        |                                                                            | (Dollars in thousands)
|Net cash paid during the period for:    |                                                                            |                        |   |         |   |      |   |         |   |  |   |        
|                                        | Interest                                                                   |                        | $ | 52,004  |   |      | $ | 45,239  |   |  | $ | 44,231  |  
|                                        | Income taxes                                                               |                        |   | 27,997  |   |      |   | 956     |   |  |   | 27,965  |  
|Other significant noncash transactions: |                                                                            |                        |   |         |   |      |   |         |   |  |   |        
|                                        | Capital equity certificates exchanged for
    preferred stock              |                        |   | 12,990  |   |      |   |         |   |  |   |         |  
|                                        | Capital equity certificates issued in exchange
    for elevator properties |                        |   | 13,355  |   |      |   | 350     |   |  |   | 1,842   |  
|                                        | Exchange of preferred stock                                                |                        |   |         |   |      |   | 7,452   |   |  |   |         |  
|                                        | Accrual of dividends and equities payable                                  |                        |   | (83,569 | ) |      |   | (39,049 | ) |  |   | (56,510 | )
|                                        | Other comprehensive income (loss)                                          |                        |   | 11,178  |   |      |   | 33,584  |   |  |   | (49,982 | )



|    |                            
|--- | ---------------------------
|14. | Related Party Transactions:

Related party transactions with equity and
cooperative investees as of August 31, 2004 and 2003 are as
follows:

|            |  |                        |           |      |  |   |         | 
|----------- |  | ---------------------- | --------- | ---- |  | - | ------- | 
|            |  | 2004                   |           | 2003
|            |  |                        |           |     
|            |  |                       
|            |  | (Dollars in thousands)
|Sales       |  | $                      | 1,185,366 |      |  | $ | 779,857 | 
|Purchases   |  |                        | 632,993   |      |  |   | 637,357 | 
|Receivables |  |                        | 17,679    |      |  |   | 13,393  | 
|Payables    |  |                        | 28,118    |      |  |   | 29,113  | 

These related party transactions were primarily
with TEMCO, LLC, CF Industries, Inc., Horizon Milling, LLC,
Agriliance, LLC, United Harvest, LLC and Ventura Foods, LLC.



|    |                      
|--- | ---------------------
|15. | Comprehensive Income:

The components of comprehensive income, net of
taxes, for the years ended August 31, 2004, 2003 and 2002 are
as follows:

|                                        |  |                        |         |      |  |      |         |   |  |   |         |  
|--------------------------------------- |  | ---------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                        |  | 2004                   |         | 2003 |  | 2002
|                                        |  |                        |         |      |  |     
|                                        |  |                       
|                                        |  | (Dollars in thousands)
|Net income                              |  | $                      | 221,332 |      |  | $    | 123,841 |   |  | $ | 126,138 |  
|Additional minimum pension liability    |  |                        | 10,016  |      |  |      | 36,106  |   |  |   | (48,797 | )
|Financial instruments                   |  |                        | 698     |      |  |      | 1,045   |   |  |   | (548    | )
|Cash flow hedges                        |  |                        | 356     |      |  |      | (3,549  | ) |  |   | (637    | )
|Foreign currency translation adjustment |  |                        | 108     |      |  |      | (18     | ) |  |   |         |  
|                                        |  |                        |         |      |  |      |         |   |  |   |         |  
|Comprehensive income                    |  | $                      | 232,510 |      |  | $    | 157,425 |   |  | $ | 76,156  |  
|                                        |  |                        |         |      |  |      |         |   |  |   |         |  

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##### Table of Contents



CHS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The components of accumulated other comprehensive
loss, net of taxes, as of August 31, 2004 and 2003 are as
follows:

|                                        |  |             |       |      |  |   |        | 
|--------------------------------------- |  | ----------- | ----- | ---- |  | - | ------ | 
|                                        |  | 2004        |       | 2003
|                                        |  |             |       |     
|                                        |  |            
|                                        |  | (Dollars in
|                                        |  | thousands) 
|Additional minimum pension liability    |  | $           | 3,930 |      |  | $ | 13,946 | 
|Financial instruments                   |  |             | (534  | )    |  |   | 164    | 
|Cash flow hedges                        |  |             | 3,829 |      |  |   | 4,185  | 
|Foreign currency translation adjustment |  |             | (90   | )    |  |   | 18     | 
|                                        |  |             |       |      |  |   |        | 
|Accumulated other comprehensive loss    |  | $           | 7,135 |      |  | $ | 18,313 | 
|                                        |  |             |       |      |  |   |        | 

F-30



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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

To the Board of Directors and Members and Patrons
of CHS Inc.:

In our opinion, the accompanying consolidated
balance sheets and the related consolidated statements of
operations, of equities and comprehensive income and of cash
flows present fairly, in all material respects, the financial
position of CHS Inc. and subsidiaries at August 31, 2004
and 2003, and the results of their operations and their cash
flows for each of the three years in the period ended
August 31, 2004, in conformity with accounting principles
generally accepted in the United States of America. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits. We
conducted our audits of these statements 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 financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

-S- PRICEWATERHOUSE COOPERS LLP

October 28, 2004

Minneapolis, Minnesota


F-31



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##### Table of Contents



INDEPENDENT AUDITORS REPORT

Members Committee

Ventura Foods, LLC


We have audited the accompanying balance sheets
of Ventura Foods, LLC (the Company) as of
March 31, 2004 and 2003, and the related statements of
income, members capital and cash flows for the years ended
March 31, 2004, 2003 and 2002. These financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
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, such financial statements present
fairly, in all material respects, the financial position of
Ventura Foods, LLC as of March 31, 2004 and 2003, and the
results of their operations and their cash flows for the years
ended March 31, 2004, 2003 and 2002 in conformity with
accounting principles generally accepted in the United States of
America.

As discussed in Note 2 to the financial
statements, the Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other
Intangible Assets, effective April 1, 2002.

Deloitte & Touche LLP

Costa Mesa, California

June 18, 2004


F-32



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##### Table of Contents



VENTURA FOODS, LLC

BALANCE SHEETS

March 31, 2004 and 2003


|                                                                                                       |                                                                                                                                                  |                           |             |             |             |   |             |             |             | 
|------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------- | ----------- | ----------- | ----------- | - | ----------- | ----------- | ----------- | 
|                                                                                                       |                                                                                                                                                  | 2004                      |             | 2003       
|                                                                                                       |                                                                                                                                                  |                           |             |            
|ASSETS (Note 3)                                                                                       
|CURRENT ASSETS:                                                                                        |                                                                                                                                                  |                           |             |             |             |   |             |            
|                                                                                                       | Cash and cash equivalents (Note 2)                                                                                                               |                           | $           | 117,783,000 |             |   | $           | 2,800,000   |            
|                                                                                                       | Trade receivables, net of allowance for doubtful
    accounts of $1,929,000 and $1,909,000 at 2004 and 2003,
    respectively (Notes 2, 3 and 4) |                           |             | 79,877,000  |             |   |             | 64,313,000  |            
|                                                                                                       | Inventories (Notes 2, 3 and 4)                                                                                                                   |                           |             | 108,605,000 |             |   |             | 92,366,000  |            
|                                                                                                       | Prepaid expenses and other current assets                                                                                                        |                           |             | 4,609,000   |             |   |             | 5,922,000   |            
|                                                                                                       | Due from Wilsey Foods, Inc. (Note 4)                                                                                                             |                           |             |             |             |   |             | 309,000     |            
|                                                                                                       | Derivative contract asset (Notes 2 and 4)                                                                                                        |                           |             | 31,073,000  |             |   |             | 18,703,000  |            
|                                                                                                       |                                                                                                                                                  |                           |             |             |             |   |             |            
|                                                                                                       |                                                                                                                                                  | Total current assets      |             |             | 341,947,000 |   |             |             | 184,413,000 | 
|                                                                                                       |                                                                                                                                                  |                           |             |             |             |   |             |            
|PROPERTY (Notes 2 and 3):                                                                              |                                                                                                                                                  |                           |             |             |             |   |             |            
|                                                                                                       | Land, buildings and improvements                                                                                                                 |                           |             | 103,903,000 |             |   |             | 102,768,000 |            
|                                                                                                       | Machinery and equipment                                                                                                                          |                           |             | 145,001,000 |             |   |             | 139,264,000 |            
|                                                                                                       | Construction-in-progress                                                                                                                         |                           |             | 13,692,000  |             |   |             | 6,905,000   |            
|                                                                                                       | Other property                                                                                                                                   |                           |             | 13,856,000  |             |   |             | 10,798,000  |            
|                                                                                                       |                                                                                                                                                  |                           |             |             |             |   |             |            
|                                                                                                       |                                                                                                                                                  | Total                     |             |             | 276,452,000 |   |             |             | 259,735,000 | 
|Less accumulated depreciation and amortization                                                         |                                                                                                                                                  |                           | 118,074,000 |             |             |   | 106,914,000 |            
|                                                                                                       |                                                                                                                                                  |                           |             |             |             |   |             |            
|                                                                                                       |                                                                                                                                                  | Property  net            |             |             | 158,378,000 |   |             |             | 152,821,000 | 
|GOODWILL, Net of amortization of $18,087,000 at
    2004 and 2003 (Notes 2 and 7)                      |                                                                                                                                                  |                           | 43,156,000  |             |             |   | 43,156,000  |            
|TRADEMARKS, Net of amortization of $8,526,000 at
    2004 and 2003 (Notes 2 and 7)                     |                                                                                                                                                  |                           | 19,318,000  |             |             |   | 19,318,000  |            
|DEFERRED COMPENSATION PLAN TRUST (Note 5)                                                              |                                                                                                                                                  |                           | 15,626,000  |             |             |   | 13,574,000  |            
|OTHER ASSETS, Net of amortization of $3,670,000
    and $3,520,000 at 2004 and 2003 (Notes 2, 3 and 7) |                                                                                                                                                  |                           | 4,319,000   |             |             |   | 4,673,000   |            
|                                                                                                       |                                                                                                                                                  |                           |             |             |             |   |             |            
|TOTAL                                                                                                  |                                                                                                                                                  | $                         | 582,744,000 |             |             | $ | 417,955,000 |            
|                                                                                                       |                                                                                                                                                  |                           |             |             |             |   |             |            
|                                                                                                      
|LIABILITIES AND MEMBERS
    CAPITAL                                                                  
|CURRENT LIABILITIES:                                                                                   |                                                                                                                                                  |                           |             |             |             |   |             |            
|                                                                                                       | Accounts payable (Note 4)                                                                                                                        |                           | $           | 81,199,000  |             |   | $           | 58,395,000  |            
|                                                                                                       | Accrued liabilities (Note 4)                                                                                                                     |                           |             | 53,325,000  |             |   |             | 36,984,000  |            
|                                                                                                       | Dividends payable                                                                                                                                |                           |             | 16,091,000  |             |   |             | 5,748,000   |            
|                                                                                                       | Bank lines of credit (Note 3)                                                                                                                    |                           |             |             |             |   |             | 20,500,000  |            
|                                                                                                       | Current portion of long-term debt (Note 3)                                                                                                       |                           |             | 2,804,000   |             |   |             | 74,228,000  |            
|                                                                                                       | Derivative contract liability (Notes 2 and 4)                                                                                                    |                           |             | 21,900,000  |             |   |             | 12,162,000  |            
|                                                                                                       |                                                                                                                                                  |                           |             |             |             |   |             |            
|                                                                                                       |                                                                                                                                                  | Total current liabilities |             |             | 175,319,000 |   |             |             | 208,017,000 | 
|LONG-TERM DEBT (Note 3)                                                                                |                                                                                                                                                  |                           | 195,152,000 |             |             |   | 22,950,000  |            
|DEFERRED COMPENSATION OBLIGATIONS (Note 5)                                                             |                                                                                                                                                  |                           | 26,513,000  |             |             |   | 20,496,000  |            
|                                                                                                       |                                                                                                                                                  |                           |             |             |             |   |             |            
|                                                                                                       |                                                                                                                                                  | Total liabilities         |             |             | 396,984,000 |   |             |             | 251,463,000 | 
|COMMITMENTS AND CONTINGENCIES (Notes 5 and
    6)                                                      |                                                                                                                                                  |                           |             |             |             |   |             |            
|MEMBERS CAPITAL                                                                                       |                                                                                                                                                  |                           | 185,760,000 |             |             |   | 166,492,000 |            
|                                                                                                       |                                                                                                                                                  |                           |             |             |             |   |             |            
|TOTAL                                                                                                  |                                                                                                                                                  | $                         | 582,744,000 |             |             | $ | 417,955,000 |            
|                                                                                                       |                                                                                                                                                  |                           |             |             |             |   |             |            

See notes to financial statements.

F-33



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##### Table of Contents



VENTURA FOODS, LLC

STATEMENTS OF INCOME

Years Ended March 31, 2004, 2003 and
2002


|                                   |                                                         |                          |               |             |             |      |               |             |             |   |             |            |            | 
|---------------------------------- | ------------------------------------------------------- | ------------------------ | ------------- | ----------- | ----------- | ---- | ------------- | ----------- | ----------- | - | ----------- | ---------- | ---------- | 
|                                   |                                                         | 2004                     |               | 2003        |             | 2002
|                                   |                                                         |                          |               |             |             |     
|NET SALES (Notes 2 and 5)          |                                                         | $                        | 1,312,356,000 |             |             | $    | 1,096,425,000 |             |             | $ | 965,521,000 |           
|COST OF GOODS SOLD (Notes 2 and 5) |                                                         |                          | 1,124,482,000 |             |             |      | 912,702,000   |             |             |   | 791,061,000 |           
|                                   |                                                         |                          |               |             |             |      |               |             |             |   |             |           
|GROSS PROFIT                       |                                                         |                          | 187,874,000   |             |             |      | 183,723,000   |             |             |   | 174,460,000 |           
|                                   |                                                         |                          |               |             |             |      |               |             |             |   |             |           
|OPERATING EXPENSES:                |                                                         |                          |               |             |             |      |               |             |             |   |             |           
|                                   | Selling, general and administrative (Notes 2
    and 5) |                          |               | 111,375,000 |             |      |               | 105,424,000 |             |   |             | 91,827,000 |           
|                                   | Amortization of intangibles (Notes 2 and 7)             |                          |               | 83,000      |             |      |               | 223,000     |             |   |             | 6,227,000  |           
|                                   |                                                         |                          |               |             |             |      |               |             |             |   |             |           
|                                   |                                                         | Total operating expenses |               |             | 111,458,000 |      |               |             | 105,647,000 |   |             |            | 98,054,000 | 
|                                   |                                                         |                          |               |             |             |      |               |             |             |   |             |           
|OPERATING INCOME                   |                                                         |                          | 76,416,000    |             |             |      | 78,076,000    |             |             |   | 76,406,000  |           
|INTEREST EXPENSE  Net (Note 4)    |                                                         |                          | 8,932,000     |             |             |      | 6,785,000     |             |             |   | 7,474,000   |           
|OTHER EXPENSE (INCOME)             |                                                         |                          | (1,758,000    | )           |             |      | 733,000       |             |             |   | (1,554,000  | )         
|                                   |                                                         |                          |               |             |             |      |               |             |             |   |             |           
|NET INCOME                         |                                                         | $                        | 69,242,000    |             |             | $    | 70,558,000    |             |             | $ | 70,486,000  |           
|                                   |                                                         |                          |               |             |             |      |               |             |             |   |             |           

See notes to financial statements.

F-34



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##### Table of Contents



VENTURA FOODS, LLC

STATEMENTS OF MEMBERS CAPITAL

Years Ended March 31, 2004, 2003 and
2002


|                         |            |             |            |             |   |       |            |             |   |   |             |             |  
|------------------------ | ---------- | ----------- | ---------- | ----------- | - | ----- | ---------- | ----------- | - | - | ----------- | ----------- | -
|                         |            | Wilsey      |            |             |   |      
|                         |            | Foods, Inc. |            | CHS, Inc.   |   | Total
|                         |            |             |            |             |   |      
|BALANCE  March 31, 2001 |            | $           | 65,872,000 |             |   | $     | 65,872,000 |             |   | $ | 131,744,000 |            
|                         | Net income |             |            | 35,243,000  |   |       |            | 35,243,000  |   |   |             | 70,486,000  |  
|                         | Dividends  |             |            | (25,757,000 | ) |       |            | (25,757,000 | ) |   |             | (51,514,000 | )
|                         |            |             |            |             |   |       |            |             |   |   |             |            
|BALANCE  March 31, 2002 |            |             | 75,358,000 |             |   |       | 75,358,000 |             |   |   | 150,716,000 |            
|                         | Net income |             |            | 35,279,000  |   |       |            | 35,279,000  |   |   |             | 70,558,000  |  
|                         | Dividends  |             |            | (27,391,000 | ) |       |            | (27,391,000 | ) |   |             | (54,782,000 | )
|                         |            |             |            |             |   |       |            |             |   |   |             |            
|BALANCE  March 31, 2003 |            |             | 83,246,000 |             |   |       | 83,246,000 |             |   |   | 166,492,000 |            
|                         | Net income |             |            | 34,621,000  |   |       |            | 34,621,000  |   |   |             | 69,242,000  |  
|                         | Dividends  |             |            | (24,987,000 | ) |       |            | (24,987,000 | ) |   |             | (49,974,000 | )
|                         |            |             |            |             |   |       |            |             |   |   |             |            
|BALANCE  March 31, 2004 |            | $           | 92,880,000 |             |   | $     | 92,880,000 |             |   | $ | 185,760,000 |            
|                         |            |             |            |             |   |       |            |             |   |   |             |            

See notes to financial statements.

F-35



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##### Table of Contents



VENTURA FOODS, LLC

STATEMENTS OF CASH FLOWS

Years Ended March 31, 2004, 2003 and
2002


|                                                                                                |                                                                                       |                                              |                                           |                                                         |            |             |             |             |            |             |             |             |            |            |             |  
|----------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | -------------------------------------------- | ----------------------------------------- | ------------------------------------------------------- | ---------- | ----------- | ----------- | ----------- | ---------- | ----------- | ----------- | ----------- | ---------- | ---------- | ----------- | -
|                                                                                                |                                                                                       | 2004                                         |                                           | 2003                                                    |            | 2002       
|                                                                                                |                                                                                       |                                              |                                           |                                                         |            |            
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                           |                                                                                       |                                              |                                           |                                                         |            |             |             |             |            |             |             |            
|                                                                                                | Net income                                                                            |                                              | $                                         | 69,242,000                                              |            |             | $           | 70,558,000  |            |             | $           | 70,486,000  |           
|                                                                                                | Adjustments to reconcile net income to net cash
    provided by operating activities: |                                              |                                           |                                                         |            |             |             |             |            |             |             |             |           
|                                                                                                |                                                                                       | Depreciation and amortization                |                                           |                                                         | 13,437,000 |             |             |             | 12,416,000 |             |             |             | 12,186,000 |           
|                                                                                                |                                                                                       | Amortization of intangibles                  |                                           |                                                         | 83,000     |             |             |             | 223,000    |             |             |             | 6,227,000  |           
|                                                                                                |                                                                                       | Impairment of other assets                   |                                           |                                                         | 984,000    |             |             |             |            |             |             |             |            |           
|                                                                                                |                                                                                       | Deferred rent                                |                                           |                                                         | 1,095,000  |             |             |             | 515,000    |             |             |             |            |           
|                                                                                                |                                                                                       | Loss on disposal of assets                   |                                           |                                                         | 646,000    |             |             |             | 872,000    |             |             |             | 324,000    |           
|                                                                                                |                                                                                       | Derivative contract asset                    |                                           |                                                         | (2,632,000 | )           |             |             | 2,637,000  |             |             |             | (1,803,000 | )         
|                                                                                                |                                                                                       | Changes in operating assets and liabilities: |                                           |                                                         |            |             |             |             |            |             |             |             |            |           
|                                                                                                |                                                                                       |                                              | Trade receivables                         |                                                         |            | (15,564,000 | )           |             |            | (7,174,000  | )           |             |            | (771,000   | )          
|                                                                                                |                                                                                       |                                              | Inventories                               |                                                         |            | (16,239,000 | )           |             |            | (29,567,000 | )           |             |            | 3,881,000  |            
|                                                                                                |                                                                                       |                                              | Prepaid expenses and other current assets |                                                         |            | 1,169,000   |             |             |            | (3,639,000  | )           |             |            | (793,000   | )          
|                                                                                                |                                                                                       |                                              | Accounts payable                          |                                                         |            | 22,804,000  |             |             |            | 6,350,000   |             |             |            | (4,491,000 | )          
|                                                                                                |                                                                                       |                                              | Accrued liabilities                       |                                                         |            | 15,246,000  |             |             |            | 10,685,000  |             |             |            | 2,893,000  |            
|                                                                                                |                                                                                       |                                              | Deferred compensation obligations         |                                                         |            | 3,965,000   |             |             |            | 4,815,000   |             |             |            | 4,866,000  |            
|                                                                                                |                                                                                       |                                              | Due from (to) affiliates                  |                                                         |            | 309,000     |             |             |            | (309,000    | )           |             |            | 47,000     |            
|                                                                                                |                                                                                       |                                              |                                           |                                                         |            |             |             |             |            |             |             |            
|                                                                                                |                                                                                       |                                              |                                           | Net cash provided by operating activities               |            |             | 94,545,000  |             |            |             | 68,382,000  |             |            |            | 93,052,000  |  
|                                                                                                |                                                                                       |                                              |                                           |                                                         |            |             |             |             |            |             |             |            
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                           |                                                                                       |                                              |                                           |                                                         |            |             |             |             |            |             |             |            
|                                                                                                | Acquisition of property                                                               |                                              |                                           | (19,698,000                                             | )          |             |             | (16,062,000 | )          |             |             | (13,268,000 | )         
|                                                                                                | Proceeds from sale of assets                                                          |                                              |                                           | 58,000                                                  |            |             |             | 1,845,000   |            |             |             | 69,000      |           
|                                                                                                | Investment in rabbi trust                                                             |                                              |                                           |                                                         |            |             |             |             |            |             |             | (13,976,000 | )         
|                                                                                                | Other assets                                                                          |                                              |                                           | (569,000                                                | )          |             |             | (1,332,000  | )          |             |             | (48,000     | )         
|                                                                                                |                                                                                       |                                              |                                           |                                                         |            |             |             |             |            |             |             |            
|                                                                                                |                                                                                       |                                              |                                           | Net cash used in investing activities                   |            |             | (20,209,000 | )           |            |             | (15,549,000 | )           |            |            | (27,223,000 | )
|                                                                                                |                                                                                       |                                              |                                           |                                                         |            |             |             |             |            |             |             |            
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                           |                                                                                       |                                              |                                           |                                                         |            |             |             |             |            |             |             |            
|                                                                                                | Borrowing of long-term debt                                                           |                                              |                                           | 175,000,000                                             |            |             |             |             |            |             |             |             |           
|                                                                                                | Repayment of long-term debt                                                           |                                              |                                           | (74,223,000                                             | )          |             |             | (12,758,000 | )          |             |             | (12,603,000 | )         
|                                                                                                | Net (payments on) borrowings from line of credit                                      |                                              |                                           | (20,500,000                                             | )          |             |             | 12,500,000  |            |             |             | 3,000,000   |           
|                                                                                                | Payment to Wilsey Foods, Inc. (Note 1)                                                |                                              |                                           |                                                         |            |             |             | (491,000    | )          |             |             | (487,000    | )         
|                                                                                                | Dividends paid                                                                        |                                              |                                           | (39,630,000                                             | )          |             |             | (58,584,000 | )          |             |             | (60,589,000 | )         
|                                                                                                |                                                                                       |                                              |                                           |                                                         |            |             |             |             |            |             |             |            
|                                                                                                |                                                                                       |                                              |                                           | Net cash provided by (used in) financing
    activities |            |             | 40,647,000  |             |            |             | (59,333,000 | )           |            |            | (70,679,000 | )
|                                                                                                |                                                                                       |                                              |                                           |                                                         |            |             |             |             |            |             |             |            
|NET INCREASE (DECREASE) IN CASH AND CASH
    EQUIVALENTS                                        |                                                                                       |                                              | 114,983,000                               |                                                         |            |             | (6,500,000  | )           |            |             | (4,850,000  | )          
|CASH AND CASH EQUIVALENTS  Beginning
    of period                                             |                                                                                       |                                              | 2,800,000                                 |                                                         |            |             | 9,300,000   |             |            |             | 14,150,000  |            
|                                                                                                |                                                                                       |                                              |                                           |                                                         |            |             |             |             |            |             |             |            
|CASH AND CASH EQUIVALENTS  End of
    period                                                   |                                                                                       | $                                            | 117,783,000                               |                                                         |            | $           | 2,800,000   |             |            | $           | 9,300,000   |            
|                                                                                                |                                                                                       |                                              |                                           |                                                         |            |             |             |             |            |             |             |            
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW
    INFORMATION  Cash paid during the period for interest |                                                                                       | $                                            | 6,250,000                                 |                                                         |            | $           | 7,183,000   |             |            | $           | 8,129,000   |            
|                                                                                                |                                                                                       |                                              |                                           |                                                         |            |             |             |             |            |             |             |            

See notes to financial statements.

F-36



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##### Table of Contents



VENTURA FOODS, LLC

NOTES TO FINANCIAL STATEMENTS

Years Ended March 31, 2004, 2003 and
2002




|   |                
|-- | ---------------
|1. | General Matters

Ventura Foods, LLC (the Company) is a
processor and distributor of edible oils used in food
preparation and a packager of food products. The Company sells
its products to national and regional restaurant chains, food
wholesalers and retail chains. In April 2002, the Company
dissolved its wholly-owned subsidiary, Ventura Jets, Inc., and
consequently no longer consolidates the financial statements.

The Company was formed pursuant to a Joint
Venture Agreement (the Agreement) dated
August 30, 1996 between Wilsey Foods, Inc.
(Wilsey) and CHS Inc. (CHS) whereby
substantially all the assets and liabilities of Wilsey and
Holsum Foods (a division of CHS) were transferred and assigned,
with certain exclusions, to the Company. Wilsey is a majority
owned subsidiary of Mitsui & Co., Ltd. From the period
of inception through March 31, 2000, Wilsey and CHS owned
60% and 40%, respectively, of the Company. On March 31,
2000, Wilsey sold a 10% interest in the Company to CHS.
Accordingly, Wilsey and CHS each own 50% of the Company.

At the formation date, a liability equal to the
net deferred income tax liability of Wilsey at August 30,
1996 was assumed by the Company. The amount was payable in five
equal annual installments of $487,000 plus a final installment
of $491,000. The final installment of $491,000 was paid during
fiscal 2003.



|   |                    
|-- | -------------------
|2. | Accounting Policies

Cash and Cash
Equivalents The Company
considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
Included in accounts payable are bank overdrafts of $1,102,000
and $15,231,000 at March 31, 2004 and 2003, respectively.

Inventories
Inventories consist of the following at March 31:

|                         |  |      |             |      |  |   |            | 
|------------------------ |  | ---- | ----------- | ---- |  | - | ---------- | 
|                         |  | 2004 |             | 2003
|                         |  |      |             |     
|Bulk oil                 |  | $    | 46,682,000  |      |  | $ | 38,751,000 | 
|Finished goods           |  |      | 40,948,000  |      |  |   | 34,119,000 | 
|Ingredients and supplies |  |      | 20,975,000  |      |  |   | 19,496,000 | 
|                         |  |      |             |      |  |   |            | 
|Total                    |  | $    | 108,605,000 |      |  | $ | 92,366,000 | 
|                         |  |      |             |      |  |   |            | 

Inventories are accounted for at the lower of
cost or market, using the first-in, first-out method. Cost for
inventories produced or modified by the Company through a
manufacturing process includes fixed and variable production
costs and raw materials costs, and inbound freight costs. Cost
for inventories purchased for resale includes the cost of the
product and freight and handling costs incurred to place the
product at the Companys point of sale.

Derivative Financial
Instruments The
Companys use of derivative financial instruments is
limited to forwards, futures and certain other delivery
contracts as discussed below. The Company enters into these
contracts to limit its exposure to price volatility of various
food oils that are critical to its processing and distribution
activities. It is the Companys policy to remain
substantially hedged with respect to edible oil product price
risk; derivative contracts are used to maintain this hedged
position. Forward purchase and sales contracts with established
market participants as well as exchange-traded futures contracts
are entered into in amounts necessary to protect against price
changes on raw materials needed for the Companys food oil
processing and distribution activities. The Company also enters
into purchase and sales commitments with major suppliers and
customers at a specified premium or discount from a future
market price (Basis Contracts). Additionally, the
Companys policies do not permit speculative trading of
such contracts. All of these qualify as derivatives under
Statement of Financial Accounting Standards

F-37



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##### Table of Contents



VENTURA FOODS, LLC


NOTES TO FINANCIAL
STATEMENTS  (Continued)

(SFAS) No. 133, Accounting
for Derivative Instruments and Hedging Activities, and are
stated at market value. Changes in market value are recognized
in the statements of income, through cost of sales, in the
periods such changes occur. The market value of futures
contracts, Basis Contracts, and forward purchase and sales
contracts is recorded separately on the balance sheets as
derivative contract assets or liabilities. These contracts have
maturities of less than one year.

The following summarizes the Companys
various derivative contracts outstanding at March 31, 2004
and 2003 (pounds and dollars in thousands)

|                                  |  |        |           |             |  |   |         |  
|--------------------------------- |  | ------ | --------- | ----------- |  | - | ------- | -
|                                  |  |        |           | Net        
|                                  |  |        |           | Unrealized 
|Forward Contracts and Commitments |  | Pounds |           | Gain (Loss)
|                                  |  |        |           |            
|March 31, 2004                    |  |        |           |             |  |   |         |  
|Forward purchases                 |  |        | 412,000   |             |  | $ | 12,164  |  
|Forward sales                     |  |        | 630,000   |             |  |   | (19,493 | )
|Basis purchase                    |  |        | 810,600   |             |  |   | 6,462   |  
|Basis sales                       |  |        | 65,100    |             |  |   | (185    | )
|Futures contracts                 |  |        | 421,400   |             |  |   | 10,225  |  
|                                  |  |        |           |             |  |   |         |  
|                                  |  |        | 2,339,100 |             |  | $ | 9,173   |  
|                                  |  |        |           |             |  |   |         |  
|March 31, 2003                    |  |        |           |             |  |   |         |  
|Forward purchases                 |  |        | 334,100   |             |  | $ | 11,060  |  
|Forward sales                     |  |        | 433,300   |             |  |   | (6,208  | )
|Basis purchase                    |  |        | 259,800   |             |  |   | 857     |  
|Basis sales                       |  |        | 17,500    |             |  |   | (126    | )
|Futures contracts                 |  |        | 146,000   |             |  |   | 958     |  
|                                  |  |        |           |             |  |   |         |  
|                                  |  |        | 1,190,700 |             |  | $ | 6,541   |  
|                                  |  |        |           |             |  |   |         |  

The fair value of futures contracts is determined
from quotes listed on the Chicago Board of Trade or other market
makers. Forward purchase and sales contracts are with various
counterparties and the fair values of such contracts are
determined from the market price of the underlying product.

The Company is exposed to loss in the event of
nonperformance by the other parties to the contracts. However,
the Company does not anticipate nonperformance by counterparties.

Property and
Depreciation Property is
stated at cost. Depreciation and amortization are provided for
using the straight-line method over the estimated useful lives
of the assets, as follows:

|                        |  |  |              | 
|----------------------- |  |  | ------------ | 
|Buildings               |  |  | 40 years     | 
|Leasehold improvements  |  |  | 3-19 years   | 
|Machinery and equipment |  |  | 10-25  years | 
|Other property          |  |  | 3-20 years   | 

Fair Value of Financial
Instruments The Company
estimates the fair value of financial instruments using the
following methods and assumptions:



| |                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------
| | Accounts Receivable and Accounts
    Payable The carrying
    amounts approximate fair value due to the short maturities of
    these instruments.
|
| | Lines of
    Credit The carrying
    amounts approximate fair value, as the interest rates are based
    upon variable reference rates.           

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##### Table of Contents



VENTURA FOODS, LLC


NOTES TO FINANCIAL
STATEMENTS  (Continued)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Long-Term
    Debt The fair value of
    long-term fixed rate debt is estimated based upon prevailing
    market interest rates available to the Company. The Company
    estimates the fair value on the $22,950,000 6.55% fixed rate
    debt as of March 31, 2004 to be $24,118,000. The Company
    estimates the fair value on the $175,000,000 senior notes fixed
    rate debt as of March 31, 2004 to approximate carrying
    value.
|
| | Futures
    Contracts The fair value
    of futures contracts (used for hedging purposes) is determined
    from quotes listed principally on the Chicago Board of Trade.                                                                                                                                                                                                                                                                    

Concentration of Credit
Risk During the years
ended March 31, 2004, 2003 and 2002, net sales to one
customer were 23%, 23% and 22% of total net sales, respectively.
This customer represents approximately 19% and 23% of trade
receivables at March 31, 2004 and 2003, respectively. The
Company performs ongoing credit evaluations of its customers and
maintains an allowance for potential credit losses.

The Company maintains cash deposits with various
financial institutions. The Company periodically evaluates the
credit standing of these financial institutions and has not
sustained any credit losses relating to such balances.

Marketable
Securities The
Companys marketable securities comprise equity securities
that have been classified as trading securities. The equity
securities are carried at fair market value based upon quoted
market prices. Unrealized (gains) and losses on equity
securities are recognized in net income and totaled $(2,052,000)
and $666,000 for the years ended March 31, 2004 and 2003,
respectively (see Note 5). The Company investments included
an enterprise with which it conducted business; an impairment
loss of $984,000 was recorded in the year ended March 31,
2004.

Goodwill and
Trademarks The Company
adopted SFAS No. 142, Goodwill and Other Intangible
Assets, effective April 1, 2002, the first day of its
2003 fiscal year. As a result, goodwill and indefinite life
intangible assets (trademarks) are no longer
amortized, but reviewed for impairment annually, or more
frequently if certain impairment indicators arise. See
Note 7 for the effect of adopting SFAS No. 142.

Other identifiable intangible assets consist of
patents, deferred financing costs and other assets, which are
amortized using the straight-line method over 5 to 15 years.

Impairment of Long-Lived
Assets Long-lived assets,
including identifiable intangibles, are reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In
performing the review for recoverability, future cash flows
expected to result from the use of the asset and its eventual
disposition are estimated. If the sum of the expected future
cash flows (undiscounted and without interest charges) is less
than the carrying amount of the asset, an impairment loss is
recorded under the discounted future cash flow method.

Advertising
Costs The Company expenses
advertising costs in the period incurred. For the years ended
March 31, 2004, 2003 and 2002, the Company incurred
advertising expenses of approximately $8,366,000, $9,039,000 and
$7,100,000, respectively.

Income
Taxes The Company is a
limited liability company and has no liability for federal and
state income taxes. Income is taxed to the members based on
their allocated share of taxable income or loss. However,
certain states tax the income of limited liability companies.
The Companys liability for such state income taxes is not
significant.

Revenue
Recognition The Company is
a processor and distributor of edible oils used in food
preparation and a packager of food products. Revenue is
recognized upon transfer of title to the customer, which occurs
generally upon shipment. In certain instances, title is
transferred upon receipt by the customer, at which time the
Company records revenue. Amounts billed to the customer as part
of a sales

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##### Table of Contents



VENTURA FOODS, LLC


NOTES TO FINANCIAL
STATEMENTS  (Continued)

transaction related to shipping and handling are
included in sales. Revenue is recorded net of discounts, rebates
and certain sales incentives.

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 and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.

Recent Accounting
Pronouncements In June
2001, the Financial Accounting Standards Board
(FASB) issued SFAS No. 143, Accounting
for Asset Retirement Obligations, which addresses financial
accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated
asset retirement costs. The adoption of SFAS No. 143
did not have a material impact on the Companys financial
statements.

In June 2002, the FASB issued
SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS No. 146
addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies EITF
Issue No. 94-03, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in
Restructuring). This statement requires that the fair value
of an initial liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred
as opposed to when the entity commits to an exit plan, thereby
eliminating the definition and requirements for recognition of
exit costs. The provisions of SFAS No. 146 are
effective for exit or disposal activities that are initiated
after December 31, 2002. The adoption of
SFAS No. 146 did not have a material impact on the
Companys financial statements.

On April 30, 2003, the FASB issued
SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities.
SFAS No. 149 amends and clarifies accounting for
derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under
SFAS No. 133. The new guidance amends
SFAS No. 133 for decisions made as part of the
Derivatives Implementation Group (DIG) process that
effectively required amendments to SFAS No. 133, and
decisions made in connection with other FASB projects dealing
with financial instruments and in connection with implementation
issues raised in relation to the application of the definition
of a derivative and characteristics of a derivative that
contains financing components. In addition, it clarifies when a
derivative contains a financing component that warrants special
reporting in the statement of cash flows. SFAS No. 149
is effective for contracts entered into or modified after
June 30, 2003 and for hedging relationships designated
after June 30, 2003. The adoption of SFAS No. 149
did not have a material impact on the Companys financial
statements.



|   |                                  
|-- | ---------------------------------
|3. | Line of Credit and Long-Term Debt

Line of
Credit At March 31,
2004, the Company had a revolving line-of-credit agreement with
a banking group to provide for borrowings of up to an aggregate
of $75,000,000. Outstanding borrowings at March 31, 2004
and 2003 were $0 and $20,500,000, respectively. The applicable
interest rates are based, at the option of the Company, at a
London InterBank Offered Rate (LIBOR) or a term
federal funds rate (TFFR) option. The
weighted-average interest rate at March 31, 2003 was 1.72%.
The line of credit matures on December 21, 2004.

Long-Term
Debt At March 31,
2003, the Company had term loans with a banking group with a
balance outstanding of $71,605,000. The interest rate applicable
to these term loans is based, at the option of the Company, at a
TFFR-based, LIBOR-based or a fixed rate option. The
weighted-average interest

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##### Table of Contents



VENTURA FOODS, LLC


NOTES TO FINANCIAL
STATEMENTS  (Continued)

rate on such borrowings at March 31, 2003
was 6.53%. The term loans with the banking group matured on
December 23, 2003.

In December 2003, the Company issued, in a
private placement, a series of senior unsecured notes in the
aggregate amount of $175,000,000. The Company issued
Series A, B and C notes in the amounts of $40,000,000,
$70,000,000 and $65,000,000, respectively. The Series A and
C notes have maturity dates of December 31, 2013 and
December 23, 2018, respectively. The notes bear interest at
an annualized rate of 5.65% and 5.95%. Interest is paid
semiannually on June 23 and December 23 and principal
is due on the maturity date. The Series B notes mature on
December 23, 2015 and bear interest at an annualized rate
of 5.65%. Interest is paid semiannually on June 23 and
December 23. Beginning on December 23, 2011, the
Company is required to make semi-annual payments of $7,777,778
on December 23 and June 23 through December 23,
2015 for principal and interest. Accrued interest at
March 31, 2004 was $2,771,000. Proceeds from the borrowing
in the amount of $71,600,000 were used to retire the long-term
debt described above. The Company incurred $632,000 of debt
issuance costs, included in other assets, which have been
deferred and are being amortized as a component of interest
expense over the term of the notes.

The Company has a standby letter of credit
available of $10,000,000 as of March 31, 2004.

At March 31, 2004 and 2003, balances
outstanding on a term loan with a bank were $22,950,000 and
$25,573,000, respectively. The agreement requires quarterly
principal and interest payments of $1,058,000. The interest rate
on this term loan is fixed at 6.55%. The term loan with the bank
matures in November 2010.

The line of credit, term loan agreement and
senior notes contain various covenants, including compliance
with debt limitations, members capital minimums, interest
coverage ratio and other financial ratios, restrictions on
mergers, consolidations, sale of assets, transactions with
affiliates and limitations on liens.

Annual maturities of long-term debt are as
follows at March 31, 2004:

|                     |  |   |             | 
|-------------------- |  | - | ----------- | 
|2005                 |  | $ | 2,804,000   | 
|2006                 |  |   | 2,987,000   | 
|2007                 |  |   | 3,187,000   | 
|2008                 |  |   | 3,401,000   | 
|2009                 |  |   | 3,629,000   | 
|Thereafter           |  |   | 181,948,000 | 
|                     |  |   |             | 
|Total                |  |   | 197,956,000 | 
|Less current portion |  |   | 2,804,000   | 
|                     |  |   |             | 
|Long-term debt       |  | $ | 195,152,000 | 
|                     |  |   |             | 



|   |                             
|-- | ----------------------------
|4. | Transactions with Affiliates

Purchases from CHS for the years ended
March 31, 2004, 2003 and 2002 were $83,592,000, $66,682,000
and $47,745,000, respectively. Sales to CHS for the years ended
March 31, 2004, 2003 and 2002 totaled $2,294,000,
$1,056,000 and $883,000, respectively. Included in accounts
payable at March 31, 2004 and 2003 were $10,000,000 and
$8,035,000, respectively, payable to CHS for purchases of oil.

During the years ended March 31, 2004, 2003,
and 2002, the Company recorded expenses of $10,006,000,
$9,402,000 and $8,487,000, respectively, to Mitsui USA for the
Companys participation in Mitsui USAs insurance
plans. Included in accounts payable at March 31, 2004 and
2003 were $1,001,000

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VENTURA FOODS, LLC


NOTES TO FINANCIAL
STATEMENTS  (Continued)

and $790,000, respectively, due to Mitsui USA in
connection with the Companys participation in such plans.

Sales to Mitsui USA for the years ended
March 31, 2004, 2003 and 2002 totaled $1,231,000,
$1,423,000 and $1,406,000, respectively. Included in trade
receivables at March 31, 2004 and 2003 were $133,000 and
$123,000, respectively, of receivables from Mitsui USA for
product sales.

Forward purchase contracts as of March 31,
2004 included commitments for purchases of 162,080,000 pounds of
oil from CHS. The Company recognized gains of $763,000,
$1,081,000 and $934,000 on such related party commitments for
the years ended March 31, 2004, 2003 and 2002, respectively.



|   |                       
|-- | ----------------------
|5. | Employee Benefit Plans

The Company has long-term incentive arrangements
for certain key executives. Benefits under the initial plan were
based on earnings over a three-to-five year period (as defined)
from January 1, 1997 through December 31, 2001. An
amount equal to the obligation incurred under the plan was
contributed to a rabbi trust that would be available to general
creditors in the event of bankruptcy. The trust holds
investments primarily in marketable securities that are recorded
at market value (classified as trading securities). The assets
in the trust are to be distributed to the employees upon
retirement. The liability under the arrangements was $15,626,000
and $13,574,000 as of March 31, 2004 and 2003,
respectively, and is included in deferred compensation
obligation in the accompanying balance sheets.

On January 1, 2002, the Company established
new long-term incentive arrangements with certain key
executives. Under these arrangements, the amount of additional
compensation is based on the attainment of cumulative
income-based or equity-based targets over a two- to three-year
period. At the end of the defined periods, assets equaling
amounts earned by individual executives will be contributed to a
rabbi trust, unless representatives of Wilsey and CHS elect to
pay such amounts directly to the respective key executives. At
March 31, 2004 and 2003, a liability for the plan of
$8,017,000 and $4,702,000, respectively, is included in
long-term deferred compensation obligation in the accompanying
balance sheets.

For the years ended March 31, 2004, 2003 and
2002, the Company recognized compensation expense under the
long-term incentive arrangements of $2,148,000, $4,264,000 and
$5,658,000, respectively.

The Company has a combined 401(k) and defined
contribution profit-sharing plan (the Plan) covering
substantially all employees not covered by collective bargaining
agreements. Under the Plan, employees can make annual voluntary
contributions not to exceed the lesser of an amount equal to 15%
of their compensation or limits established by the Internal
Revenue Code. The Company is required, by the Plan, to make
certain matching contributions of up to 4% of each
participants salary and may make discretionary
profit-sharing contributions. Expenses under this plan for the
years ended March 31, 2004, 2003 and 2002 were $4,576,000,
$6,484,000 and $5,855,000, respectively. The Company also
established a 401(k) defined contribution plan covering
employees under certain collective bargaining agreements. Under
this plan, employees can make annual voluntary contributions of
up to 15% of their compensation. Certain of the Companys
union employees are participants in multiemployer plans.
Payments to multiemployer pension plans are negotiated in
various collective bargaining agreements and aggregated
$2,660,000, $2,367,000 and $1,162,000 for the years ended
March 31, 2004, 2003 and 2002, respectively. The actuarial
present value of accumulated plan benefits and net assets
available for benefits to union employees under these
multiemployer pension plans is not available, as the Company
does not administer these plans.

Effective January 1, 1999, the Company
established a Supplemental Executive Retirement Plan for certain
of its employees. The projected benefit obligation as of
March 31, 2004 and 2003 was $3,922,000 and $2,955,000,
respectively. A liability of $2,862,000 and $2,220,000 as of
March 31, 2004 and 2003, respectively, is included in
long-term deferred compensation obligation in the accompanying
balance

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##### Table of Contents



VENTURA FOODS, LLC


NOTES TO FINANCIAL
STATEMENTS  (Continued)

sheets. The plan is unfunded. During the years
ended March 31, 2004, 2003 and 2002, the Company recorded
an expense related to the plan of $642,000, $552,000 and
$111,000, respectively.

The assumptions used in the measurement of the
Companys benefit obligation are as follows:

|                              |  |          |      |      |  |      |      |  |  |  |      | 
|----------------------------- |  | -------- | ---- | ---- |  | ---- | ---- |  |  |  | ---- | 
|                              |  |         
|                              |  | March 31
|                              |  |         
|                              |  | 2004     |      | 2003 |  | 2002
|                              |  |          |      |      |  |     
|Discount rate                 |  |          | 6.0% |      |  |      | 6.0% |  |  |  | 7.0% | 
|Rate of compensation increase |  |          | 3.0% |      |  |      | 3.0% |  |  |  | 3.0% | 

The Company accrues the actuarially determined
amount necessary to fund the participants benefits in
accordance with the requirements of the Employee Retirement
Income Security Act of 1974.



|   |                              
|-- | -----------------------------
|6. | Commitments and Contingencies

Future minimum annual payments under
noncancelable operating leases with lease terms in excess of one
year at March 31, 2004 are as follows:

|           |  |            |            |          |  |            |           |  |  |   |            | 
|---------- |  | ---------- | ---------- | -------- |  | ---------- | --------- |  |  | - | ---------- | 
|           |  |            |            | Sublease |  | Net Lease 
|           |  | Gross Rent |            | Income   |  | Commitment
|           |  |            |            |          |  |           
|2005       |  | $          | 8,186,000  |          |  | $          | 942,000   |  |  | $ | 7,244,000  | 
|2006       |  |            | 6,551,000  |          |  |            | 942,000   |  |  |   | 5,609,000  | 
|2007       |  |            | 4,848,000  |          |  |            | 942,000   |  |  |   | 3,906,000  | 
|2008       |  |            | 3,914,000  |          |  |            | 707,000   |  |  |   | 3,207,000  | 
|2009       |  |            | 3,351,000  |          |  |            |           |  |  |   | 3,351,000  | 
|Thereafter |  |            | 12,948,000 |          |  |            |           |  |  |   | 12,948,000 | 
|           |  |            |            |          |  |            |           |  |  |   |            | 
|Total      |  | $          | 39,798,000 |          |  | $          | 3,533,000 |  |  | $ | 36,265,000 | 
|           |  |            |            |          |  |            |           |  |  |   |            | 

Under the lease agreements, the Company is
obligated to pay certain property taxes, insurance and
maintenance costs. Certain leases contain renewal and purchase
options. Rental expense for the years ended March 31, 2004,
2003 and 2002 under operating leases totaled $8,336,000,
$7,138,000 and $5,671,000, respectively.

The Company is involved from time to time in
routine legal matters incidental to its business. The Company
believes that the resolution of such matters will not have a
material adverse effect on the Companys business,
financial condition or results of operations.



|   |         
|-- | --------
|7. | Goodwill

In June 2001, the FASB issued
SFAS No. 141, Business Combinations, and
No. 142, Goodwill and Other Intangible Assets. These
statements, among other things, eliminate the
pooling-of-interests method of accounting for business
combinations as of June 30, 2001, eliminate the
amortization of goodwill and indefinite life intangible assets
for all fiscal years beginning after December 15, 2001, and
require that goodwill and indefinite life intangible assets be
reviewed annually for impairment, or more frequently if
impairment indicators arise. The Company adopted SFAS
Nos. 141 and 142 with respect to new goodwill as of
July 1, 2001 and adopted SFAS No. 142 with
respect to existing goodwill and indefinite life intangible
assets as of April 1, 2002, the first day of its 2003
fiscal year. The adoption of SFAS No. 141 did not
impact the Companys financial condition or results of
operations. Upon the adoption of SFAS No. 142, the
Company ceased amortizing existing goodwill and trademarks.

The Company completed the transitional test of
goodwill and trademarks during 2003. Based on the result of the
test, the Company determined that there was no impairment of
goodwill and trademarks as of

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VENTURA FOODS, LLC


NOTES TO FINANCIAL
STATEMENTS  (Continued)

April 1, 2002. Pursuant to
SFAS No. 142, goodwill and trademarks will be tested
for impairment at least annually and more frequently if an event
occurs which indicates that goodwill or trademarks may be
impaired. Based on the result of the test, the Company
determined that there was no impairment of goodwill and
trademarks as of March 31, 2004 and March 31, 2003.
During 2003, the Company abandoned the use of certain trademarks
with a net book value of $100,000.

A reconciliation of net income to the amount
adjusted for the exclusion of goodwill and trademarks
amortization follows for the years ended March 31:

|                    |                        |      |            |      |  |      |            |  |  |   |            |           | 
|------------------- | ---------------------- | ---- | ---------- | ---- |  | ---- | ---------- |  |  | - | ---------- | --------- | 
|                    |                        | 2004 |            | 2003 |  | 2002
|                    |                        |      |            |      |  |     
|Reported net income |                        | $    | 69,242,000 |      |  | $    | 70,558,000 |  |  | $ | 70,486,000 |          
|Add:                |                        |      |            |      |  |      |            |  |  |   |            |          
|                    | Goodwill amortization  |      |            |      |  |      |            |  |  |   |            | 3,972,000 | 
|                    | Trademark amortization |      |            |      |  |      |            |  |  |   |            | 1,853,000 | 
|                    |                        |      |            |      |  |      |            |  |  |   |            |          
|Adjusted net income |                        | $    | 69,242,000 |      |  | $    | 70,558,000 |  |  | $ | 76,311,000 |          
|                    |                        |      |            |      |  |      |            |  |  |   |            |          

Amortization expense for other intangible assets
subject to amortization was $83,000, $223,000 and $402,000 for
the years ended March 31, 2004, 2003 and 2002,
respectively. Estimated annual amortization for each of the
years in the five-year period ending March 31, 2009 is
$40,000.



|   |                  
|-- | -----------------
|8. | Subsequent Events

On April 2, 2004, the Company purchased the
assets of portion packing company for $7,437,000 before certain
closing adjustments.

* * * * * *

F-44