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SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549


Form 10-Q

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | QUARTERLY REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|          
|           |  | for the quarterly period ended
    February 29, 2004.                                       
|          
|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

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, MN 55077                 |  | (651) 355-6000                                          
|(Address of principal executive offices,
    including zip code)   |  | (Registrants telephone number,
    including area code)

Include 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 whether the Registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Exchange
Act).     YES o          NO þ

Indicate the number of shares outstanding of each
of the issuers classes of common stock, as of the latest
practicable date.

|      |  |                             
|----- |  | ----------------------------
|      |  | Number of Shares Outstanding
|Class |  | at February 29, 2004        
|      |  |                             
|NONE  |  | NONE                        









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INDEX

|                                           |  |                                                                                                                                             |    |          |    | 
|------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------- | -- | -------- | -- | 
|                                           |  |                                                                                                                                             |    | Page No.
|                                           |  |                                                                                                                                             |    |         
|PART I. FINANCIAL
    INFORMATION         
|Item 1.                                    |  | Financial Statements                                                                                                                        |    |          | 3  | 
|                                           |  | Consolidated Balance Sheets
    as of February 29, 2004, August 31, 2003 and
    February 28, 2003 (unaudited)                              |    |          | 3  | 
|                                           |  | Consolidated Statements of
    Operations for the three months and six months ended
    February 29, 2004 and February 28, 2003 (unaudited) |    |          | 4  | 
|                                           |  | Consolidated Statements of
    Cash Flows for the three months and six months ended
    February 29, 2004 and February 28, 2003 (unaudited) |    |          | 5  | 
|                                           |  | Notes to Consolidated
    Financial Statements (unaudited)                                                                                  |    |          | 6  | 
|                                          
|Item 2.                                    |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations                                                   |    |          | 15 | 
|                                          
|Item 3.                                    |  | Quantitative and Qualitative
    Disclosures about Market Risk                                                                              |    |          | 32 | 
|                                          
|Item 4.                                    |  | Controls and Procedures                                                                                                                     |    |          | 32 | 
|                                          
|PART II. OTHER
    INFORMATION            
|                                          
|Item 6.                                    |  | Exhibits and Reports on
    Form 8-K                                                                                                        |    |          | 33 | 
|                                          
|SIGNATURE
    PAGE                         |  |                                                                                                                                             | 34 |         
|2003 Amended and Restated Credit Agreement
|Master Loan Agreement                     
|Uncommitted Revolving Credit Supplement   
|Uncommitted Revolving Credit Supplement   
|Certification Pursuant to Section 302     
|Certification Pursuant to Section 302     
|Certification Pursuant to Section 906     
|Certification Pursuant to Section 906     



1



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##### Table of Contents






PART I. FINANCIAL INFORMATION

SAFE HARBOR STATEMENT UNDER THE
PRIVATE

SECURITIES LITIGATION REFORM ACT OF
1995


This Quarterly Report on Form 10-Q contains
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended. These forward-looking statements involve risks and
uncertainties that may cause the Companys actual results
to differ materially from the results discussed in the
forward-looking statements. These factors include those set
forth in Item 2. Managements Discussion and Analysis
of Financial Condition and Results of Operations, under the
caption Cautionary Statement Regarding Forward-Looking
Statements to this Quarterly Report on Form 10-Q for
the quarterly period ended February 29, 2004.

2



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|        |                     
|------- | --------------------
|Item 1. | Financial Statements



CHS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)


|                                   |                                   |                                |           |            |           |              |           |         |           |  |           |         |           | 
|---------------------------------- | --------------------------------- | ------------------------------ | --------- | ---------- | --------- | ------------ | --------- | ------- | --------- |  | --------- | ------- | --------- | 
|                                   |                                   | February 29,                   |           | August 31, |           | February 28,
|                                   |                                   | 2004                           |           | 2003       |           | 2003        
|                                   |                                   |                                |           |            |           |             
|                                   |                                   |                               
|                                   |                                   | (dollars in thousands)        
|ASSETS                            
|Current assets:                    |                                   |                                |           |            |           |              |           |         |           |  |           |        
|                                   | Cash and cash equivalents         |                                | $         | 98,506     |           |              | $         | 168,249 |           |  | $         | 108,886 |          
|                                   | Receivables                       |                                |           | 762,892    |           |              |           | 763,780 |           |  |           | 767,147 |          
|                                   | Inventories                       |                                |           | 1,001,276  |           |              |           | 801,883 |           |  |           | 861,753 |          
|                                   | Other current assets              |                                |           | 493,864    |           |              |           | 178,661 |           |  |           | 254,841 |          
|                                   |                                   |                                |           |            |           |              |           |         |           |  |           |        
|                                   |                                   | Total current assets           |           |            | 2,356,538 |              |           |         | 1,912,573 |  |           |         | 1,992,627 | 
|Investments                        |                                   |                                | 522,340   |            |           |              | 532,893   |         |           |  | 469,456   |        
|Property, plant and equipment      |                                   |                                | 1,156,256 |            |           |              | 1,122,982 |         |           |  | 1,075,152 |        
|Other assets                       |                                   |                                | 250,420   |            |           |              | 239,520   |         |           |  | 178,357   |        
|                                   |                                   |                                |           |            |           |              |           |         |           |  |           |        
|                                   |                                   | Total assets                   |           | $          | 4,285,554 |              |           | $       | 3,807,968 |  |           | $       | 3,715,592 | 
|                                   |                                   |                                |           |            |           |              |           |         |           |  |           |        
|                                  
|LIABILITIES AND EQUITIES          
|Current liabilities:               |                                   |                                |           |            |           |              |           |         |           |  |           |        
|                                   | Notes payable                     |                                | $         | 600,836    |           |              | $         | 251,131 |           |  | $         | 370,561 |          
|                                   | Current portion of long-term debt |                                |           | 18,606     |           |              |           | 14,951  |           |  |           | 59,987  |          
|                                   | Customer credit balances          |                                |           | 126,653    |           |              |           | 58,417  |           |  |           | 103,420 |          
|                                   | Customer advance payments         |                                |           | 111,317    |           |              |           | 123,383 |           |  |           | 159,538 |          
|                                   | Checks and drafts outstanding     |                                |           | 102,304    |           |              |           | 85,239  |           |  |           | 55,750  |          
|                                   | Accounts payable                  |                                |           | 502,322    |           |              |           | 627,250 |           |  |           | 470,048 |          
|                                   | Accrued expenses                  |                                |           | 383,242    |           |              |           | 254,415 |           |  |           | 229,990 |          
|                                   | Dividends and equities payable    |                                |           | 36,058     |           |              |           | 39,049  |           |  |           | 20,580  |          
|                                   |                                   |                                |           |            |           |              |           |         |           |  |           |        
|                                   |                                   | Total current liabilities      |           |            | 1,881,338 |              |           |         | 1,453,835 |  |           |         | 1,469,874 | 
|Long-term debt                     |                                   |                                | 636,964   |            |           |              | 648,222   |         |           |  | 649,863   |        
|Other liabilities                  |                                   |                                | 123,273   |            |           |              | 111,555   |         |           |  | 111,302   |        
|Minority interests in subsidiaries |                                   |                                | 119,769   |            |           |              | 112,645   |         |           |  | 98,222    |        
|Commitments and contingencies      |                                   |                                |           |            |           |              |           |         |           |  |           |        
|Equities                           |                                   |                                | 1,524,210 |            |           |              | 1,481,711 |         |           |  | 1,386,331 |        
|                                   |                                   |                                |           |            |           |              |           |         |           |  |           |        
|                                   |                                   | Total liabilities and equities |           | $          | 4,285,554 |              |           | $       | 3,807,968 |  |           | $       | 3,715,592 | 
|                                   |                                   |                                |           |            |           |              |           |         |           |  |           |        

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

3



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CHS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS


(Unaudited)


|                                      |                     |                            |           |                          |  |              |           |              |  |   |           |           |  |   |           |           | 
|------------------------------------- | ------------------- | -------------------------- | --------- | ------------------------ |  | ------------ | --------- | ------------ |  | - | --------- | --------- |  | - | --------- | --------- | 
|                                      |                     |                            |           |                         
|                                      |                     | For the Three Months Ended |           | For the Six Months Ended
|                                      |                     |                            |           |                         
|                                      |                     | February 29,               |           | February 28,             |  | February 29, |           | February 28,
|                                      |                     | 2004                       |           | 2003                     |  | 2004         |           | 2003        
|                                      |                     |                            |           |                          |  |              |           |             
|                                      |                     |                           
|                                      |                     | (dollars in thousands)    
|Revenues:                             |                     |                            |           |                          |  |              |           |              |  |   |           |           |  |   |           |          
|                                      | Net sales           |                            | $         | 2,654,596                |  |              | $         | 2,328,154    |  |   | $         | 5,143,940 |  |   | $         | 4,728,750 | 
|                                      | Patronage dividends |                            |           | 3,641                    |  |              |           | 793          |  |   |           | 3,961     |  |   |           | 959       | 
|                                      | Other revenues      |                            |           | 30,770                   |  |              |           | 26,645       |  |   |           | 63,483    |  |   |           | 59,987    | 
|                                      |                     |                            |           |                          |  |              |           |              |  |   |           |           |  |   |           |          
|                                      |                     |                            | 2,689,007 |                          |  |              | 2,355,592 |              |  |   | 5,211,384 |           |  |   | 4,789,696 |          
|Cost of goods sold                    |                     |                            | 2,628,099 |                          |  |              | 2,303,183 |              |  |   | 5,042,629 |           |  |   | 4,639,995 |          
|Marketing, general and administrative |                     |                            | 52,811    |                          |  |              | 48,072    |              |  |   | 100,543   |           |  |   | 91,220    |          
|                                      |                     |                            |           |                          |  |              |           |              |  |   |           |           |  |   |           |          
|Operating earnings                    |                     |                            | 8,097     |                          |  |              | 4,337     |              |  |   | 68,212    |           |  |   | 58,481    |          
|Gain on legal settlements             |                     |                            |           |                          |  |              | (8,892    | )            |  |   |           |           |  |   | (10,689   | )        
|Interest                              |                     |                            | 13,482    |                          |  |              | 11,436    |              |  |   | 25,022    |           |  |   | 24,249    |          
|Equity (income) loss from investments |                     |                            | (18,080   | )                        |  |              | 5,772     |              |  |   | (31,787   | )         |  |   | (2,393    | )        
|Minority interests                    |                     |                            | 3,220     |                          |  |              | 3,345     |              |  |   | 7,142     |           |  |   | 8,776     |          
|                                      |                     |                            |           |                          |  |              |           |              |  |   |           |           |  |   |           |          
|Income (loss) before income taxes     |                     |                            | 9,475     |                          |  |              | (7,324    | )            |  |   | 67,835    |           |  |   | 38,538    |          
|Income taxes                          |                     |                            | 964       |                          |  |              | (3,224    | )            |  |   | 8,585     |           |  |   | 2,282     |          
|                                      |                     |                            |           |                          |  |              |           |              |  |   |           |           |  |   |           |          
|Net income (loss)                     |                     | $                          | 8,511     |                          |  | $            | (4,100    | )            |  | $ | 59,250    |           |  | $ | 36,256    |          
|                                      |                     |                            |           |                          |  |              |           |              |  |   |           |           |  |   |           |          

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

4



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CHS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(Unaudited)


|                                                         |                                                                                          |                                                          |                                       |                                           |         |              |          |              |        |          |          |          |         |          |          |         |        |          |          |  
|-------------------------------------------------------- | ---------------------------------------------------------------------------------------- | -------------------------------------------------------- | ------------------------------------- | ----------------------------------------- | ------- | ------------ | -------- | ------------ | ------ | -------- | -------- | -------- | ------- | -------- | -------- | ------- | ------ | -------- | -------- | -
|                                                         |                                                                                          |                                                          |                                       |                                          
|                                                         |                                                                                          | For the Three Months Ended                               |                                       | For the Six Months Ended                 
|                                                         |                                                                                          |                                                          |                                       |                                          
|                                                         |                                                                                          | February 29,                                             |                                       | February 28,                              |         | February 29, |          | February 28,
|                                                         |                                                                                          | 2004                                                     |                                       | 2003                                      |         | 2004         |          | 2003        
|                                                         |                                                                                          |                                                          |                                       |                                           |         |              |          |             
|                                                         |                                                                                          |                                                         
|                                                         |                                                                                          | (dollars in thousands)                                  
|Cash flows from operating activities:                    |                                                                                          |                                                          |                                       |                                           |         |              |          |              |        |          |          |          |         |          |          |        
|                                                         | Net income (loss)                                                                        |                                                          | $                                     | 8,511                                     |         |              | $        | (4,100       | )      |          | $        | 59,250   |         |          | $        | 36,256  |       
|                                                         | Adjustments to reconcile net income (loss) to net
    cash used in operating activities: |                                                          |                                       |                                           |         |              |          |              |        |          |          |          |         |          |          |         |       
|                                                         |                                                                                          | Depreciation and amortization                            |                                       |                                           | 27,045  |              |          |              | 25,768 |          |          |          | 53,860  |          |          |         | 51,634 |         
|                                                         |                                                                                          | Noncash (income) loss from equity investments            |                                       |                                           | (18,080 | )            |          |              | 5,772  |          |          |          | (31,787 | )        |          |         | (2,393 | )       
|                                                         |                                                                                          | Minority interests                                       |                                       |                                           | 3,220   |              |          |              | 3,345  |          |          |          | 7,142   |          |          |         | 8,776  |         
|                                                         |                                                                                          | Noncash portion of patronage dividends received          |                                       |                                           | (2,519  | )            |          |              | (497   | )        |          |          | (2,830  | )        |          |         | (681   | )       
|                                                         |                                                                                          | Loss (gain) on sale of property, plant and
    equipment |                                       |                                           | 198     |              |          |              | (733   | )        |          |          | 141     |          |          |         | (270   | )       
|                                                         |                                                                                          | Other, net                                               |                                       |                                           | 313     |              |          |              | 2,014  |          |          |          | 540     |          |          |         | 2,460  |         
|                                                         |                                                                                          | Changes in operating assets and liabilities:             |                                       |                                           |         |              |          |              |        |          |          |          |         |          |          |         |        |         
|                                                         |                                                                                          |                                                          | Receivables                           |                                           |         | 56,820       |          |              |        | 58,292   |          |          |         | 11,798   |          |         |        | (7,692   | )       
|                                                         |                                                                                          |                                                          | Inventories                           |                                           |         | 25,773       |          |              |        | 68,242   |          |          |         | (189,113 | )        |         |        | (93,635  | )       
|                                                         |                                                                                          |                                                          | Other current assets and other assets |                                           |         | (200,256     | )        |              |        | (51,237  | )        |          |         | (323,170 | )        |         |        | (118,008 | )       
|                                                         |                                                                                          |                                                          | Customer credit balances              |                                           |         | 52,768       |          |              |        | 11,628   |          |          |         | 65,606   |          |         |        | 76,959   |         
|                                                         |                                                                                          |                                                          | Customer advance payments             |                                           |         | (57,054      | )        |              |        | (62,599  | )        |          |         | (12,079  | )        |         |        | (9,585   | )       
|                                                         |                                                                                          |                                                          | Accounts payable and accrued expenses |                                           |         | (106,537     | )        |              |        | (173,503 | )        |          |         | (16,263  | )        |         |        | (44,198  | )       
|                                                         |                                                                                          |                                                          | Other liabilities                     |                                           |         | 5,069        |          |              |        | (4,842   | )        |          |         | 11,718   |          |         |        | (6,978   | )       
|                                                         |                                                                                          |                                                          |                                       |                                           |         |              |          |              |        |          |          |          |         |          |          |        
|                                                         |                                                                                          |                                                          |                                       | Net cash used in operating activities     |         |              | (204,729 | )            |        |          | (122,450 | )        |         |          | (365,187 | )       |        |          | (107,355 | )
|                                                         |                                                                                          |                                                          |                                       |                                           |         |              |          |              |        |          |          |          |         |          |          |        
|Cash flows from investing activities:                    |                                                                                          |                                                          |                                       |                                           |         |              |          |              |        |          |          |          |         |          |          |        
|                                                         | Acquisition of property, plant and equipment                                             |                                                          |                                       | (49,989                                   | )       |              |          | (36,762      | )      |          |          | (102,222 | )       |          |          | (77,375 | )     
|                                                         | Proceeds from disposition of property, plant and
    equipment                           |                                                          |                                       | 8,078                                     |         |              |          | 7,177        |        |          |          | 29,742   |         |          |          | 11,925  |       
|                                                         | Investments                                                                              |                                                          |                                       | (1,012                                    | )       |              |          | (2,791       | )      |          |          | (1,022   | )       |          |          | (4,175  | )     
|                                                         | Equity investments redeemed                                                              |                                                          |                                       | 16,010                                    |         |              |          | 12,780       |        |          |          | 43,503   |         |          |          | 28,093  |       
|                                                         | Investments redeemed                                                                     |                                                          |                                       | 2,657                                     |         |              |          | 1,670        |        |          |          | 6,115    |         |          |          | 3,383   |       
|                                                         | Changes in notes receivable                                                              |                                                          |                                       | 248                                       |         |              |          | (275         | )      |          |          | (5,896   | )       |          |          | (11,516 | )     
|                                                         | Acquisitions of intangibles                                                              |                                                          |                                       |                                           |         |              |          | (55          | )      |          |          |          |         |          |          | (434    | )     
|                                                         | Acquisitions of working capital, net                                                     |                                                          |                                       |                                           |         |              |          |              |        |          |          |          |         |          |          | (13,030 | )     
|                                                         | Distribution to minority owners                                                          |                                                          |                                       |                                           |         |              |          |              |        |          |          | (1,338   | )       |          |          | (463    | )     
|                                                         | Other investing activities, net                                                          |                                                          |                                       | 696                                       |         |              |          | 23           |        |          |          | 3,203    |         |          |          | 467     |       
|                                                         |                                                                                          |                                                          |                                       |                                           |         |              |          |              |        |          |          |          |         |          |          |        
|                                                         |                                                                                          |                                                          |                                       | Net cash used in investing activities     |         |              | (23,312  | )            |        |          | (18,233  | )        |         |          | (27,915  | )       |        |          | (63,125  | )
|                                                         |                                                                                          |                                                          |                                       |                                           |         |              |          |              |        |          |          |          |         |          |          |        
|Cash flows from financing activities:                    |                                                                                          |                                                          |                                       |                                           |         |              |          |              |        |          |          |          |         |          |          |        
|                                                         | Changes in notes payable                                                                 |                                                          |                                       | 223,990                                   |         |              |          | 124,500      |        |          |          | 349,705  |         |          |          | 38,047  |       
|                                                         | Long-term debt borrowings                                                                |                                                          |                                       | 445                                       |         |              |          |              |        |          |          | 445      |         |          |          | 175,000 |       
|                                                         | Principal payments on long-term debt                                                     |                                                          |                                       | (4,500                                    | )       |              |          | (33,377      | )      |          |          | (8,271   | )       |          |          | (37,279 | )     
|                                                         | Payments on derivative instruments                                                       |                                                          |                                       |                                           |         |              |          |              |        |          |          |          |         |          |          | (7,574  | )     
|                                                         | Changes in checks and drafts outstanding                                                 |                                                          |                                       | 19,194                                    |         |              |          | (14,400      | )      |          |          | 16,290   |         |          |          | (28,501 | )     
|                                                         | Proceeds from sale of preferred stock, net of
    expenses                               |                                                          |                                       | (53                                       | )       |              |          | 82,516       |        |          |          | (53      | )       |          |          | 82,580  |       
|                                                         | Preferred stock dividends paid                                                           |                                                          |                                       | (1,874                                    | )       |              |          | (190         | )      |          |          | (3,748   | )       |          |          | (374    | )     
|                                                         | Retirements of equities                                                                  |                                                          |                                       | (1,583                                    | )       |              |          | (21,938      | )      |          |          | (2,851   | )       |          |          | (24,360 | )     
|                                                         | Cash patronage dividends paid                                                            |                                                          |                                       | (28,158                                   | )       |              |          | (26,365      | )      |          |          | (28,158  | )       |          |          | (26,365 | )     
|                                                         |                                                                                          |                                                          |                                       |                                           |         |              |          |              |        |          |          |          |         |          |          |        
|                                                         |                                                                                          |                                                          |                                       | Net cash provided by financing activities |         |              | 207,461  |              |        |          | 110,746  |          |         |          | 323,359  |         |        |          | 171,174  |  
|                                                         |                                                                                          |                                                          |                                       |                                           |         |              |          |              |        |          |          |          |         |          |          |        
|Net (decrease) increase in cash and cash
    equivalents |                                                                                          |                                                          | (20,580                               | )                                         |         |              | (29,937  | )            |        |          | (69,743  | )        |         |          | 694      |        
|Cash and cash equivalents at beginning of period         |                                                                                          |                                                          | 119,086                               |                                           |         |              | 138,823  |              |        |          | 168,249  |          |         |          | 108,192  |        
|                                                         |                                                                                          |                                                          |                                       |                                           |         |              |          |              |        |          |          |          |         |          |          |        
|Cash and cash equivalents at end of period               |                                                                                          | $                                                        | 98,506                                |                                           |         | $            | 108,886  |              |        | $        | 98,506   |          |         | $        | 108,886  |        
|                                                         |                                                                                          |                                                          |                                       |                                           |         |              |          |              |        |          |          |          |         |          |          |        

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

5



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##### Table of Contents






CHS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(Dollars in thousands)




|        |                    
|------- | -------------------
|Note 1. | Accounting Policies

The unaudited consolidated balance sheets as of
February 29, 2004 and February 28, 2003, and the
statements of operations and cash flows for the three and six
months ended February 29, 2004 and February 28, 2003
reflect, in the opinion of management of CHS Inc. (CHS or
the Company), all normal recurring adjustments necessary for a
fair presentation of the financial position and results of
operations and cash flows for the interim periods presented. The
results of operations and cash flows for interim periods are not
necessarily indicative of results for a full fiscal year because
of, among other things, the seasonal nature of the
Companys businesses. The consolidated balance sheet data
as of August 31, 2003 has been derived from the audited
consolidated financial statements but does not include all
disclosures required by accounting principles generally accepted
in the United States of America.

The consolidated financial statements include the
accounts of the Company and all of its wholly-owned and
majority-owned subsidiaries and limited liability companies. The
effects of all significant intercompany accounts and
transactions have been eliminated.

These statements should be read in conjunction
with the consolidated financial statements and notes thereto for
the year ended August 31, 2003, included in the
Companys Annual Report on Form 10-K, as amended,
filed with the Securities and Exchange Commission.



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

The Company had $27.1 million of goodwill as
of February 29, 2004, and during the three months and six
months then ended, the Company had no additions or disposals of
goodwill.

Intangible assets subject to amortization
primarily include trademarks, tradenames, customer lists and
non-compete agreements, and are amortized on a straight-line
basis over the number of years that approximate their respective
useful lives (ranging from 2 to 15 years). The gross
carrying amount of these intangible assets is $35.3 million
with total accumulated amortization of $11.5 million as of
February 29, 2004. Intangible assets of $0.2 million
(non-cash acquisition) and $0.4 million were acquired
during the six months ended February 29, 2004 and
February 28, 2003, respectively. Total amortization expense
for intangible assets during the three-month and six-month
periods ended February 29, 2004, was approximately
$0.8 million and $2.1 million, respectively, and
$1.2 million and $2.3 million, respectively, for the
same periods in 2003. The estimated amortization expense related
to intangible assets subject to amortization for the next five
years will approximate $2.7 million annually.



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

On December 23, 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 June 15, 2004. All other provisions under this
Statement are effective for fiscal years ending after
December 15, 2003 and interim periods beginning after
December 15, 2003. The Company will adopt the interim
provisions of this Statement beginning in the third quarter of
2004. All other provisions of this Statement will be adopted in
the fourth quarter of 2004.

On January 12, 2004, the FASB issued a FASB
Staff Position (FSP) regarding SFAS No. 106,
Employers Accounting for Postretirement Benefits
Other Than Pensions. FSP 106-1, 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

6



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CHS INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)

(the Act) enacted on December 8,
2003. FSP 106-1 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 currently. 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 and the appropriate accounting. The Companys
measures of APBO and net periodic postretirement benefit costs
as of and for the quarter ended February 29, 2004 do not
reflect the effect of the Act as permitted by the FSP.

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. The Company has not finalized its assessments and has
not yet determined what the effects of adopting this standard
will have on the Company.

In May 2003, the 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). Many of those instruments
were previously classified as equity. 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 any effect on the Company.



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

Certain reclassifications have been made to prior
years amounts to conform to current year classifications.
In addition, the Company previously amended its Quarterly Report
on Form 10-Q for the period ended February 28, 2003 to
restate its financial statements for such period. The
restatement reduced previously reported net sales and cost of
goods sold to eliminate intercompany sales. These
reclassifications and restatement had no effect on previously
reported net income, equities and comprehensive income, or cash
flows.

Note 2.     Receivables

|                                      |  |              |         |            |  |              |         |  |  |   |         | 
|------------------------------------- |  | ------------ | ------- | ---------- |  | ------------ | ------- |  |  | - | ------- | 
|                                      |  | February 29, |         | August 31, |  | February 28,
|                                      |  | 2004         |         | 2003       |  | 2003        
|                                      |  |              |         |            |  |             
|Trade                                 |  | $            | 743,714 |            |  | $            | 748,398 |  |  | $ | 727,301 | 
|Other                                 |  |              | 52,921  |            |  |              | 47,000  |  |  |   | 66,362  | 
|                                      |  |              |         |            |  |              |         |  |  |   |         | 
|                                      |  |              | 796,635 |            |  |              | 795,398 |  |  |   | 793,663 | 
|Less allowances for doubtful accounts |  |              | 33,743  |            |  |              | 31,618  |  |  |   | 26,516  | 
|                                      |  |              |         |            |  |              |         |  |  |   |         | 
|                                      |  | $            | 762,892 |            |  | $            | 763,780 |  |  | $ | 767,147 | 
|                                      |  |              |         |            |  |              |         |  |  |   |         | 

7



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##### Table of Contents



CHS INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)



|        |            
|------- | -----------
|Note 3. | Inventories

|                            |  |              |           |            |  |              |         |  |  |   |         | 
|--------------------------- |  | ------------ | --------- | ---------- |  | ------------ | ------- |  |  | - | ------- | 
|                            |  | February 29, |           | August 31, |  | February 28,
|                            |  | 2004         |           | 2003       |  | 2003        
|                            |  |              |           |            |  |             
|Grain and oilseed           |  | $            | 543,781   |            |  | $            | 370,381 |  |  | $ | 411,584 | 
|Energy                      |  |              | 245,909   |            |  |              | 292,095 |  |  |   | 274,008 | 
|Feed and farm supplies      |  |              | 166,191   |            |  |              | 95,589  |  |  |   | 134,446 | 
|Processed grain and oilseed |  |              | 44,210    |            |  |              | 42,688  |  |  |   | 35,225  | 
|Other                       |  |              | 1,185     |            |  |              | 1,130   |  |  |   | 6,490   | 
|                            |  |              |           |            |  |              |         |  |  |   |         | 
|                            |  | $            | 1,001,276 |            |  | $            | 801,883 |  |  | $ | 861,753 | 
|                            |  |              |           |            |  |              |         |  |  |   |         | 



|        |                                  
|------- | ---------------------------------
|Note 4. | Derivative Assets and Liabilities

Included in other current assets on
February 29, 2004, August 31, 2003 and
February 28, 2003 are derivative assets of
$234.7 million, $54.5 million and $42.1 million,
respectively. Included in accrued expenses on February 29,
2004, August 31, 2003 and February 28, 2003 are
derivative liabilities of $189.1 million,
$46.5 million and $42.6 million, respectively.



|        |            
|------- | -----------
|Note 5. | Investments

In April 2003, the Company acquired an additional
economic interest in the wholesale crop protection products
business of Agriliance, LLC (the CPP Business),
which constitutes a part of the Agriliances business
operations. The Company acquired 13.1% of the CPP Business for a
cash payment of $34.3 million. The economic interests in
Agriliance, LLC are 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 Industries, Inc.
(Farmland). The ownership or governance interests in Agriliance,
LLC did not change with the purchase of this additional economic
interest. Agriliance, LLC earnings are split among the members
based upon the respective economic interests of each member.

In March 2004, the Company signed an agreement
for the sale of all of Farmlands interests in Agriliance,
LLC to the Company. The sale is contingent upon bankruptcy court
approval in the Farmland bankruptcy case. A bankruptcy court
hearing on the matter is scheduled for April 20, 2004. The
proposed purchase price is $27.5 million. Upon completion
of this transaction, the Company will own 50% of the economic
and governance interests in Agriliance, LLC.

The following provides summarized unaudited
financial information for the Companys unconsolidated
significant equity investments in Ventura Foods, LLC (50% equity
ownership) and Agriliance, LLC, for the three-month and
six-month periods as indicated below.



| |                   
| | ------------------
| | Ventura Foods, LLC

|             |  |                            |         |                          |  |              |         |              |  |   |         |  |  |   |         | 
|------------ |  | -------------------------- | ------- | ------------------------ |  | ------------ | ------- | ------------ |  | - | ------- |  |  | - | ------- | 
|             |  |                            |         |                         
|             |  | For the Three Months Ended |         | For the Six Months Ended
|             |  |                            |         |                         
|             |  | February 29,               |         | February 28,             |  | February 29, |         | February 28,
|             |  | 2004                       |         | 2003                     |  | 2004         |         | 2003        
|             |  |                            |         |                          |  |              |         |             
|Net sales    |  | $                          | 330,432 |                          |  | $            | 275,392 |              |  | $ | 674,551 |  |  | $ | 562,417 | 
|Gross profit |  |                            | 52,414  |                          |  |              | 29,643  |              |  |   | 105,322 |  |  |   | 79,371  | 
|Net income   |  |                            | 23,696  |                          |  |              | 1,612   |              |  |   | 47,312  |  |  |   | 22,403  | 

8



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##### Table of Contents



CHS INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)

|                        |  |              |         |            |  |              |         |  |  |   |         | 
|----------------------- |  | ------------ | ------- | ---------- |  | ------------ | ------- |  |  | - | ------- | 
|                        |  | February 29, |         | August 31, |  | February 28,
|                        |  | 2004         |         | 2003       |  | 2003        
|                        |  |              |         |            |  |             
|Current assets          |  | $            | 310,774 |            |  | $            | 193,632 |  |  | $ | 181,825 | 
|Non-current assets      |  |              | 238,052 |            |  |              | 231,649 |  |  |   | 231,700 | 
|Current liabilities     |  |              | 154,945 |            |  |              | 227,400 |  |  |   | 220,497 | 
|Non-current liabilities |  |              | 196,077 |            |  |              | 21,738  |  |  |   | 22,950  | 

Agriliance,
LLC

|             |  |                            |         |                          |  |              |         |              |  |   |           |   |  |   |           |  
|------------ |  | -------------------------- | ------- | ------------------------ |  | ------------ | ------- | ------------ |  | - | --------- | - |  | - | --------- | -
|             |  |                            |         |                         
|             |  | For the Three Months Ended |         | For the Six Months Ended
|             |  |                            |         |                         
|             |  | February 29,               |         | February 28,             |  | February 29, |         | February 28,
|             |  | 2004                       |         | 2003                     |  | 2004         |         | 2003        
|             |  |                            |         |                          |  |              |         |             
|Net sales    |  | $                          | 472,949 |                          |  | $            | 553,390 |              |  | $ | 1,078,202 |   |  | $ | 1,146,120 |  
|Gross profit |  |                            | 57,431  |                          |  |              | 44,924  |              |  |   | 108,649   |   |  |   | 93,446    |  
|Net loss     |  |                            | (4,885  | )                        |  |              | (25,246 | )            |  |   | (19,327   | ) |  |   | (45,356   | )

|                        |  |              |           |            |  |              |           |  |  |   |           | 
|----------------------- |  | ------------ | --------- | ---------- |  | ------------ | --------- |  |  | - | --------- | 
|                        |  | February 29, |           | August 31, |  | February 28,
|                        |  | 2004         |           | 2003       |  | 2003        
|                        |  |              |           |            |  |             
|Current assets          |  | $            | 1,438,953 |            |  | $            | 1,249,941 |  |  | $ | 1,219,602 | 
|Non-current assets      |  |              | 117,392   |            |  |              | 119,615   |  |  |   | 126,346   | 
|Current liabilities     |  |              | 1,195,708 |            |  |              | 1,083,743 |  |  |   | 1,070,495 | 
|Non-current liabilities |  |              | 175,811   |            |  |              | 27,061    |  |  |   | 107,466   | 

Note 6.     Equities

The following provides unaudited changes in
equity for the six month periods as indicated below:

|                                                        |  |      |           |      |  |   |           |  
|------------------------------------------------------- |  | ---- | --------- | ---- |  | - | --------- | -
|                                                        |  | 2004 |           | 2003
|                                                        |  |      |           |     
|Balances, September 1, 2003 and 2002                    |  | $    | 1,481,711 |      |  | $ | 1,289,638 |  
|Net income                                              |  |      | 59,250    |      |  |   | 36,256    |  
|Other comprehensive income (loss)                       |  |      | 2,304     |      |  |   | (6,583    | )
|Patronage distribution                                  |  |      | (93,445   | )    |  |   | (87,859   | )
|Patronage accrued 2003                                  |  |      | 90,000    |      |  |   | 92,900    |  
|Equities retired                                        |  |      | (2,851    | )    |  |   | (24,360   | )
|Equity retirements accrued 2003                         |  |      | 2,851     |      |  |   | 24,360    |  
|Equities issued in exchange for elevator
    properties |  |      | 13,363    |      |  |   |           |  
|Preferred stock issued, net of expenses                 |  |      |           |      |  |   | 82,580    |  
|Preferred stock dividends                               |  |      | (3,748    | )    |  |   | (374      | )
|Preferred stock dividends accrued 2003                  |  |      | 1,249     |      |  |   |           |  
|Accrued dividends and equities payable                  |  |      | (28,109   | )    |  |   | (16,300   | )
|Other, net                                              |  |      | 1,635     |      |  |   | (3,927    | )
|                                                        |  |      |           |      |  |   |           |  
|Balances, February 29, 2004 and
    February 28, 2003   |  | $    | 1,524,210 |      |  | $ | 1,386,331 |  
|                                                        |  |      |           |      |  |   |           |  

In 2001 and 2002 the Company issued approximately
$9.5 million (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 Company issued 3,450,000
shares of 8% Cumulative Redeemable Preferred Stock (New
Preferred) at a price of $25.00 per share, for proceeds of
$86.3 million, which are listed on the NASDAQ National
Market. The Board of Directors intent is to pay quarterly
dividends. Expenses related to the issuance of the New Preferred
were $3.8 million.

9



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##### Table of Contents



CHS INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)

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 $7.5 million (7,452,439 shares), and
the balance of the Old Preferred (2,002,435 shares) was redeemed
in cash at $1.00 per share. As of February 29, 2004 the
Company had $93.7 million (3,748,099 shares) of the New
Preferred outstanding.

In March 2004, $13.0 million of capital
equity certificates were redeemed in exchange for shares of the
Companys 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 for one share of the stock on the NASDAQ National
Market on March 2, 2004. After the exchange, the number of
shares of New Preferred outstanding was 4,227,414.

Note 7.     Comprehensive
Income

Total comprehensive income primarily consists of
net income, additional minimum pension liability and cash flow
hedges. For the three months ended February 29, 2004 and
February 28, 2003, total comprehensive income amounted to
$10.3 million income and $4.9 million loss,
respectively. For the six months ended February 29, 2004
and February 28, 2003, total comprehensive income amounted
to $61.6 million and $29.7 million, respectively.
Accumulated other comprehensive loss on February 29, 2004,
August 31, 2003 and February 28, 2003 was
$16.0 million, $18.3 million and $58.5 million,
respectively.



|        |                    
|------- | -------------------
|Note 8. | Non-Cash Activities

During the six months ended February 29,
2004 and February 28, 2003 the Company accrued dividends
and equities payable of $28.1 million and
$16.3 million, respectively.

During the six months ended February 29,
2004 the Company issued capital equity certificates in the
amount of $13.4 million in exchange for elevator properties.



|        |                  
|------- | -----------------
|Note 9. | Segment Reporting

The Company manages five business segments, which
are based on products and services, and are 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
sunflower, feed and farm supplies. The Country Operations
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. 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 joint venture, and from the sale 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.

10



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##### Table of Contents



CHS INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)

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. Therefore, 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.

11



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##### Table of Contents



CHS INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)

Segment information for the three months and six
months ended February 29, 2004 and February 28, 2003
is as follows:

|                                                 |                                                    |          |     |         |   |              |           |           |   |            |           |           |   |             |           |           |   |  |         |         |   |  |       |         |   |  |          |          |   |  |           |           |  
|------------------------------------------------ | -------------------------------------------------- | -------- | --- | ------- | - | ------------ | --------- | --------- | - | ---------- | --------- | --------- | - | ----------- | --------- | --------- | - |  | ------- | ------- | - |  | ----- | ------- | - |  | -------- | -------- | - |  | --------- | --------- | -
|                                                 |                                                    |          |     |         |   | Country      |           |           |   | Processed  |           |           |   |             |           |          
|                                                 |                                                    |          |     |         |   | Operations   |           | Grain     |   | Grains and |           |           |   | Reconciling |           |          
|                                                 |                                                    | Agronomy |     | Energy  |   | and Services |           | Marketing |   | Foods      |           | Other     |   | Amounts     |           | Total    
|                                                 |                                                    |          |     |         |   |              |           |           |   |            |           |           |   |             |           |          
|For the Three Months Ended February 29,
    2004 |                                                    |          |     |         |   |              |           |           |   |            |           |           |   |             |           |           |   |  |         |         |   |  |       |         |   |  |          |          |   |  |           |          
|                                                 | Net sales                                          |          |     |         |   |              | $         | 906,251   |   |            | $         | 495,613   |   |             | $         | 1,367,823 |   |  | $       | 193,257 |   |  |       |         |   |  | $        | (308,348 | ) |  | $         | 2,654,596 |  
|                                                 | Patronage dividends                                |          |     |         |   |              |           | 1,097     |   |            |           | 2,481     |   |             |           | 39        |   |  |         |         |   |  | $     | 24      |   |  |          |          |   |  |           | 3,641     |  
|                                                 | Other revenues                                     |          |     |         |   |              |           | (222      | ) |            |           | 20,460    |   |             |           | 8,061     |   |  |         | 984     |   |  |       | 1,487   |   |  |          |          |   |  |           | 30,770    |  
|                                                 |                                                    |          |     |         |   |              |           |           |   |            |           |           |   |             |           |           |   |  |         |         |   |  |       |         |   |  |          |          |   |  |           |          
|                                                 |                                                    |          |     |         |   |              | 907,126   |           |   |            | 518,554   |           |   |             | 1,375,923 |           |   |  | 194,241 |         |   |  | 1,511 |         |   |  | (308,348 | )        |   |  | 2,689,007 |          
|                                                 | Cost of goods sold                                 |          |     |         |   |              |           | 892,386   |   |            |           | 488,528   |   |             |           | 1,370,335 |   |  |         | 185,198 |   |  |       |         |   |  |          | (308,348 | ) |  |           | 2,628,099 |  
|                                                 | Marketing, general and administrative              |          | $   | 2,454   |   |              |           | 16,716    |   |            |           | 16,671    |   |             |           | 6,125     |   |  |         | 9,328   |   |  |       | 1,517   |   |  |          |          |   |  |           | 52,811    |  
|                                                 | Interest                                           |          |     | (95     | ) |              |           | 3,714     |   |            |           | 4,259     |   |             |           | 1,369     |   |  |         | 3,993   |   |  |       | 242     |   |  |          |          |   |  |           | 13,482    |  
|                                                 | Equity (income) loss from investments              |          |     | (1,310  | ) |              |           | 7         |   |            |           | (244      | ) |             |           | (2,731    | ) |  |         | (13,802 | ) |  |       |         |   |  |          |          |   |  |           | (18,080   | )
|                                                 | Minority interests                                 |          |     |         |   |              |           | 2,707     |   |            |           | 513       |   |             |           |           |   |  |         |         |   |  |       |         |   |  |          |          |   |  |           | 3,220     |  
|                                                 |                                                    |          |     |         |   |              |           |           |   |            |           |           |   |             |           |           |   |  |         |         |   |  |       |         |   |  |          |          |   |  |           |          
|                                                 | (Loss) income before income taxes                  |          | $   | (1,049  | ) |              | $         | (8,404    | ) |            | $         | 8,827     |   |             | $         | 825       |   |  | $       | 9,524   |   |  | $     | (248    | ) |  | $        |         |   |  | $         | 9,475     |  
|                                                 |                                                    |          |     |         |   |              |           |           |   |            |           |           |   |             |           |           |   |  |         |         |   |  |       |         |   |  |          |          |   |  |           |          
|                                                 | Intersegment sales                                 |          |     |         |   |              | $         | (28,309   | ) |            | $         | (271,124  | ) |             | $         | (8,915    | ) |  |         |         |   |  |       |         |   |  | $        | 308,348  |   |  | $         |          |  
|                                                 |                                                    |          |     |         |   |              |           |           |   |            |           |           |   |             |           |           |   |  |         |         |   |  |       |         |   |  |          |          |   |  |           |          
|                                                 | Capital expenditures                               |          |     |         |   |              | $         | 32,389    |   |            | $         | 8,633     |   |             | $         | 2,998     |   |  | $       | 7,861   |   |  | $     | 352     |   |  |          |          |   |  | $         | 52,233    |  
|                                                 |                                                    |          |     |         |   |              |           |           |   |            |           |           |   |             |           |           |   |  |         |         |   |  |       |         |   |  |          |          |   |  |           |          
|                                                 | Depreciation and amortization                      |          | $   | 311     |   |              | $         | 14,434    |   |            | $         | 5,792     |   |             | $         | 1,861     |   |  | $       | 3,857   |   |  | $     | 790     |   |  |          |          |   |  | $         | 27,045    |  
|                                                 |                                                    |          |     |         |   |              |           |           |   |            |           |           |   |             |           |           |   |  |         |         |   |  |       |         |   |  |          |          |   |  |           |          
|For the Three Months Ended February 28,
    2003 |                                                    |          |     |         |   |              |           |           |   |            |           |           |   |             |           |           |   |  |         |         |   |  |       |         |   |  |          |          |   |  |           |          
|                                                 | Net sales                                          |          |     |         |   |              | $         | 900,029   |   |            | $         | 430,832   |   |             | $         | 1,104,296 |   |  | $       | 128,291 |   |  |       |         |   |  | $        | (235,294 | ) |  | $         | 2,328,154 |  
|                                                 | Patronage dividends                                |          | $   | (57     | ) |              |           | 50        |   |            |           | 795       |   |             |           | (52       | ) |  |         | 27      |   |  | $     | 30      |   |  |          |          |   |  |           | 793       |  
|                                                 | Other revenues                                     |          |     |         |   |              |           | 848       |   |            |           | 16,448    |   |             |           | 6,232     |   |  |         | 947     |   |  |       | 2,170   |   |  |          |          |   |  |           | 26,645    |  
|                                                 |                                                    |          |     |         |   |              |           |           |   |            |           |           |   |             |           |           |   |  |         |         |   |  |       |         |   |  |          |          |   |  |           |          
|                                                 |                                                    |          | (57 | )       |   |              | 900,927   |           |   |            | 448,075   |           |   |             | 1,110,476 |           |   |  | 129,265 |         |   |  | 2,200 |         |   |  | (235,294 | )        |   |  | 2,355,592 |          
|                                                 | Cost of goods sold                                 |          |     |         |   |              |           | 886,560   |   |            |           | 429,749   |   |             |           | 1,102,203 |   |  |         | 119,965 |   |  |       |         |   |  |          | (235,294 | ) |  |           | 2,303,183 |  
|                                                 | Marketing, general and administrative              |          |     | 1,578   |   |              |           | 13,577    |   |            |           | 15,332    |   |             |           | 5,912     |   |  |         | 10,057  |   |  |       | 1,616   |   |  |          |          |   |  |           | 48,072    |  
|                                                 | Gain on legal settlement                           |          |     |         |   |              |           |           |   |            |           | (8,892    | ) |             |           |           |   |  |         |         |   |  |       |         |   |  |          |          |   |  |           | (8,892    | )
|                                                 | Interest                                           |          |     | (380    | ) |              |           | 4,001     |   |            |           | 2,616     |   |             |           | 1,024     |   |  |         | 3,319   |   |  |       | 856     |   |  |          |          |   |  |           | 11,436    |  
|                                                 | Equity loss (income) from investments              |          |     | 6,012   |   |              |           | (235      | ) |            |           | (255      | ) |             |           | 1,710     |   |  |         | (1,460  | ) |  |       |         |   |  |          |          |   |  |           | 5,772     |  
|                                                 | Minority interests                                 |          |     |         |   |              |           | 3,070     |   |            |           | 275       |   |             |           |           |   |  |         |         |   |  |       |         |   |  |          |          |   |  |           | 3,345     |  
|                                                 |                                                    |          |     |         |   |              |           |           |   |            |           |           |   |             |           |           |   |  |         |         |   |  |       |         |   |  |          |          |   |  |           |          
|                                                 | (Loss) income before income taxes                  |          | $   | (7,267  | ) |              | $         | (6,046    | ) |            | $         | 9,250     |   |             | $         | (373      | ) |  | $       | (2,616  | ) |  | $     | (272    | ) |  | $        |         |   |  | $         | (7,324    | )
|                                                 |                                                    |          |     |         |   |              |           |           |   |            |           |           |   |             |           |           |   |  |         |         |   |  |       |         |   |  |          |          |   |  |           |          
|                                                 | Intersegment sales                                 |          |     |         |   |              | $         | (22,936   | ) |            | $         | (211,832  | ) |             | $         | (526      | ) |  |         |         |   |  |       |         |   |  | $        | 235,294  |   |  | $         |          |  
|                                                 |                                                    |          |     |         |   |              |           |           |   |            |           |           |   |             |           |           |   |  |         |         |   |  |       |         |   |  |          |          |   |  |           |          
|                                                 | Capital expenditures                               |          |     |         |   |              | $         | 36,089    |   |            | $         | 5,200     |   |             | $         | 1,172     |   |  | $       | 7,109   |   |  | $     | 419     |   |  |          |          |   |  | $         | 49,989    |  
|                                                 |                                                    |          |     |         |   |              |           |           |   |            |           |           |   |             |           |           |   |  |         |         |   |  |       |         |   |  |          |          |   |  |           |          
|                                                 | Depreciation and amortization                      |          | $   | 311     |   |              | $         | 14,510    |   |            | $         | 5,333     |   |             | $         | 1,605     |   |  | $       | 3,267   |   |  | $     | 742     |   |  |          |          |   |  | $         | 25,768    |  
|                                                 |                                                    |          |     |         |   |              |           |           |   |            |           |           |   |             |           |           |   |  |         |         |   |  |       |         |   |  |          |          |   |  |           |          
|For the Six Months Ended February 29,
    2004   |                                                    |          |     |         |   |              |           |           |   |            |           |           |   |             |           |           |   |  |         |         |   |  |       |         |   |  |          |          |   |  |           |          
|                                                 | Net sales                                          |          |     |         |   |              | $         | 1,822,291 |   |            | $         | 998,557   |   |             | $         | 2,573,040 |   |  | $       | 343,882 |   |  |       |         |   |  | $        | (593,830 | ) |  | $         | 5,143,940 |  
|                                                 | Patronage dividends                                |          |     |         |   |              |           | 1,112     |   |            |           | 2,501     |   |             |           | 300       |   |  |         |         |   |  | $     | 48      |   |  |          |          |   |  |           | 3,961     |  
|                                                 | Other revenues                                     |          |     |         |   |              |           | 2,632     |   |            |           | 41,538    |   |             |           | 14,981    |   |  |         | 1,796   |   |  |       | 2,536   |   |  |          |          |   |  |           | 63,483    |  
|                                                 |                                                    |          |     |         |   |              |           |           |   |            |           |           |   |             |           |           |   |  |         |         |   |  |       |         |   |  |          |          |   |  |           |          
|                                                 |                                                    |          |     |         |   |              | 1,826,035 |           |   |            | 1,042,596 |           |   |             | 2,588,321 |           |   |  | 345,678 |         |   |  | 2,584 |         |   |  | (593,830 | )        |   |  | 5,211,384 |          
|                                                 | Cost of goods sold                                 |          |     |         |   |              |           | 1,752,334 |   |            |           | 984,730   |   |             |           | 2,573,931 |   |  |         | 325,464 |   |  |       |         |   |  |          | (593,830 | ) |  |           | 5,042,629 |  
|                                                 | Marketing, general and administrative              |          | $   | 3,768   |   |              |           | 31,282    |   |            |           | 31,822    |   |             |           | 12,314    |   |  |         | 18,433  |   |  |       | 2,924   |   |  |          |          |   |  |           | 100,543   |  
|                                                 | Interest                                           |          |     | (178    | ) |              |           | 7,513     |   |            |           | 7,504     |   |             |           | 2,523     |   |  |         | 7,509   |   |  |       | 151     |   |  |          |          |   |  |           | 25,022    |  
|                                                 | Equity loss (income) from investments              |          |     | 1,821   |   |              |           | (289      | ) |            |           | (269      | ) |             |           | (4,706    | ) |  |         | (28,344 | ) |  |       |         |   |  |          |          |   |  |           | (31,787   | )
|                                                 | Minority interests                                 |          |     |         |   |              |           | 6,396     |   |            |           | 746       |   |             |           |           |   |  |         |         |   |  |       |         |   |  |          |          |   |  |           | 7,142     |  
|                                                 |                                                    |          |     |         |   |              |           |           |   |            |           |           |   |             |           |           |   |  |         |         |   |  |       |         |   |  |          |          |   |  |           |          
|                                                 | (Loss) income before income taxes                  |          | $   | (5,411  | ) |              | $         | 28,799    |   |            | $         | 18,063    |   |             | $         | 4,259     |   |  | $       | 22,616  |   |  | $     | (491    | ) |  | $        |         |   |  | $         | 67,835    |  
|                                                 |                                                    |          |     |         |   |              |           |           |   |            |           |           |   |             |           |           |   |  |         |         |   |  |       |         |   |  |          |          |   |  |           |          
|                                                 | Intersegment sales                                 |          |     |         |   |              | $         | (55,445   | ) |            | $         | (519,105  | ) |             | $         | (19,280   | ) |  |         |         |   |  |       |         |   |  | $        | 593,830  |   |  | $         |          |  
|                                                 |                                                    |          |     |         |   |              |           |           |   |            |           |           |   |             |           |           |   |  |         |         |   |  |       |         |   |  |          |          |   |  |           |          
|                                                 | Goodwill assets                                    |          |     |         |   |              | $         | 3,185     |   |            | $         | 262       |   |             |           |           |   |  | $       | 23,605  |   |  |       |         |   |  |          |          |   |  | $         | 27,052    |  
|                                                 |                                                    |          |     |         |   |              |           |           |   |            |           |           |   |             |           |           |   |  |         |         |   |  |       |         |   |  |          |          |   |  |           |          
|                                                 | Capital expenditures                               |          |     |         |   |              | $         | 68,478    |   |            | $         | 13,833    |   |             | $         | 4,170     |   |  | $       | 14,970  |   |  | $     | 771     |   |  |          |          |   |  | $         | 102,222   |  
|                                                 |                                                    |          |     |         |   |              |           |           |   |            |           |           |   |             |           |           |   |  |         |         |   |  |       |         |   |  |          |          |   |  |           |          
|                                                 | Depreciation and amortization                      |          | $   | 623     |   |              | $         | 28,847    |   |            | $         | 11,012    |   |             | $         | 4,138     |   |  | $       | 7,673   |   |  | $     | 1,567   |   |  |          |          |   |  | $         | 53,860    |  
|                                                 |                                                    |          |     |         |   |              |           |           |   |            |           |           |   |             |           |           |   |  |         |         |   |  |       |         |   |  |          |          |   |  |           |          
|                                                 | Total identifiable assets at February 29,
    2004 |          | $   | 263,346 |   |              | $         | 1,336,458 |   |            | $         | 1,259,849 |   |             | $         | 586,039   |   |  | $       | 548,540 |   |  | $     | 291,322 |   |  |          |          |   |  | $         | 4,285,554 |  
|                                                 |                                                    |          |     |         |   |              |           |           |   |            |           |           |   |             |           |           |   |  |         |         |   |  |       |         |   |  |          |          |   |  |           |          
|For the Six Months Ended February 28,
    2003   |                                                    |          |     |         |   |              |           |           |   |            |           |           |   |             |           |           |   |  |         |         |   |  |       |         |   |  |          |          |   |  |           |          
|                                                 | Net sales                                          |          |     |         |   |              | $         | 1,811,618 |   |            | $         | 919,898   |   |             | $         | 2,265,850 |   |  | $       | 242,124 |   |  |       |         |   |  | $        | (510,740 | ) |  | $         | 4,728,750 |  
|                                                 | Patronage dividends                                |          | $   | (57     | ) |              |           | 63        |   |            |           | 846       |   |             |           | 26        |   |  |         | 27      |   |  | $     | 54      |   |  |          |          |   |  |           | 959       |  
|                                                 | Other revenues                                     |          |     |         |   |              |           | 1,837     |   |            |           | 40,985    |   |             |           | 12,836    |   |  |         | 1,856   |   |  |       | 2,473   |   |  |          |          |   |  |           | 59,987    |  
|                                                 |                                                    |          |     |         |   |              |           |           |   |            |           |           |   |             |           |           |   |  |         |         |   |  |       |         |   |  |          |          |   |  |           |          
|                                                 |                                                    |          | (57 | )       |   |              | 1,813,518 |           |   |            | 961,729   |           |   |             | 2,278,712 |           |   |  | 244,007 |         |   |  | 2,527 |         |   |  | (510,740 | )        |   |  | 4,789,696 |          
|                                                 | Cost of goods sold                                 |          |     |         |   |              |           | 1,745,142 |   |            |           | 917,659   |   |             |           | 2,261,650 |   |  |         | 226,284 |   |  |       |         |   |  |          | (510,740 | ) |  |           | 4,639,995 |  
|                                                 | Marketing, general and administrative              |          |     | 2,718   |   |              |           | 27,762    |   |            |           | 27,935    |   |             |           | 11,983    |   |  |         | 18,145  |   |  |       | 2,677   |   |  |          |          |   |  |           | 91,220    |  
|                                                 | Gain on legal settlement                           |          |     |         |   |              |           |           |   |            |           | (10,689   | ) |             |           |           |   |  |         |         |   |  |       |         |   |  |          |          |   |  |           | (10,689   | )
|                                                 | Interest                                           |          |     | (678    | ) |              |           | 8,011     |   |            |           | 8,004     |   |             |           | 2,882     |   |  |         | 5,665   |   |  |       | 365     |   |  |          |          |   |  |           | 24,249    |  
|                                                 | Equity loss (income) from investments              |          |     | 10,030  |   |              |           | (555      | ) |            |           | (470      | ) |             |           | 896       |   |  |         | (12,294 | ) |  |       |         |   |  |          |          |   |  |           | (2,393    | )
|                                                 | Minority interests                                 |          |     |         |   |              |           | 8,205     |   |            |           | 571       |   |             |           |           |   |  |         |         |   |  |       |         |   |  |          |          |   |  |           | 8,776     |  
|                                                 |                                                    |          |     |         |   |              |           |           |   |            |           |           |   |             |           |           |   |  |         |         |   |  |       |         |   |  |          |          |   |  |           |          
|                                                 | (Loss) income before income taxes                  |          | $   | (12,127 | ) |              | $         | 24,953    |   |            | $         | 18,719    |   |             | $         | 1,301     |   |  | $       | 6,207   |   |  | $     | (515    | ) |  | $        |         |   |  | $         | 38,538    |  
|                                                 |                                                    |          |     |         |   |              |           |           |   |            |           |           |   |             |           |           |   |  |         |         |   |  |       |         |   |  |          |          |   |  |           |          
|                                                 | Intersegment sales                                 |          |     |         |   |              | $         | (46,946   | ) |            | $         | (462,960  | ) |             | $         | (834      | ) |  |         |         |   |  |       |         |   |  | $        | 510,740  |   |  | $         |          |  
|                                                 |                                                    |          |     |         |   |              |           |           |   |            |           |           |   |             |           |           |   |  |         |         |   |  |       |         |   |  |          |          |   |  |           |          
|                                                 | Goodwill assets                                    |          |     |         |   |              | $         | 3,647     |   |            | $         | 262       |   |             |           |           |   |  | $       | 23,605  |   |  |       |         |   |  |          |          |   |  | $         | 27,514    |  
|                                                 |                                                    |          |     |         |   |              |           |           |   |            |           |           |   |             |           |           |   |  |         |         |   |  |       |         |   |  |          |          |   |  |           |          
|                                                 | Capital expenditures                               |          |     |         |   |              | $         | 34,024    |   |            | $         | 13,351    |   |             | $         | 916       |   |  | $       | 27,964  |   |  | $     | 1,120   |   |  |          |          |   |  | $         | 77,375    |  
|                                                 |                                                    |          |     |         |   |              |           |           |   |            |           |           |   |             |           |           |   |  |         |         |   |  |       |         |   |  |          |          |   |  |           |          
|                                                 | Depreciation and amortization                      |          | $   | 623     |   |              | $         | 29,048    |   |            | $         | 10,754    |   |             | $         | 3,210     |   |  | $       | 6,402   |   |  | $     | 1,597   |   |  |          |          |   |  | $         | 51,634    |  
|                                                 |                                                    |          |     |         |   |              |           |           |   |            |           |           |   |             |           |           |   |  |         |         |   |  |       |         |   |  |          |          |   |  |           |          
|                                                 | Total identifiable assets at February 28,
    2003 |          | $   | 222,578 |   |              | $         | 1,363,611 |   |            | $         | 986,896   |   |             | $         | 466,919   |   |  | $       | 454,453 |   |  | $     | 221,135 |   |  |          |          |   |  | $         | 3,715,592 |  
|                                                 |                                                    |          |     |         |   |              |           |           |   |            |           |           |   |             |           |           |   |  |         |         |   |  |       |         |   |  |          |          |   |  |           |          

12



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##### Table of Contents



CHS INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)



|         |                              
|-------- | -----------------------------
|Note 10. | Commitments and Contingencies



| |              
| | -------------
| | Environmental

The Company expects to incur capital expenditures
related to the Environmental Protection Agency low sulfur fuel
regulations required by 2006. These expenditures were started in
fiscal 2002, and are expected to be approximately
$87.0 million for the Companys Laurel, Montana
refinery and $324.0 million for NCRAs McPherson,
Kansas refinery, of which $21.4 million has been spent at
the Laurel refinery and $69.3 million has been spent by
NCRA at the McPherson refinery as of February 29, 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.



| |           
| | ----------
| | Guarantees

In November 2002, the FASB issued FASB
Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. The interpretation
addresses the 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 are sold to CoBank, ACB, 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.

13



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##### Table of Contents



CHS INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (Continued)

The Companys obligations pursuant to its
guarantees as of February 29, 2004 are as follows:

|                                                                      |  |                        |        |              |  |                     |        |                 |  |                                                                                                                                                                                                                                     |  |                                                                                                                                                                                            |  |                                            |  |                                                 |  |                                                                                                                      
|--------------------------------------------------------------------- |  | ---------------------- | ------ | ------------ |  | ------------------- | ------ | --------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------------------ |  | ----------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------
|                                                                      |  | Guarantee/             |        | Exposure on  |  |                     |        |                 |  |                                                                                                                                                                                                                                     |  |                                                                                                                                                                                            |  |                                           
|                                                                      |  | Maximum                |        | February 29, |  |                     |        |                 |  |                                                                                                                                                                                                                                     |  |                                                                                                                                                                                            |  | Assets Held as                            
|Entities                                                              |  | Exposure               |        | 2004         |  | Nature of Guarantee |        | Expiration Date |  | Triggering Event                                                                                                                                                                                                                    |  | Recourse Provisions                                                                                                                                                                        |  | Collateral                                
|                                                                      |  |                        |        |              |  |                     |        |                 |  |                                                                                                                                                                                                                                     |  |                                                                                                                                                                                            |  |                                           
|                                                                      |  |                        |        |              |  |                     |        |                 |  |                                                                                                                                                                                                                                     |  |                                                                                                                                                                                           
|                                                                      |  | (dollars in thousands) |        |              |  |                     |        |                 |  |                                                                                                                                                                                                                                     |  |                                                                                                                                                                                           
|The Companys financial services cooperative
    loans sold to CoBank |  |                        | *      |              |  | $                   | 14,272 |                 |  | 10% of the obligations of borrowers (agri-
    cultural 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                        |  |                        | *      |              |  |                     | 20,143 |                 |  | 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 |              |  |                     | 12,925 |                 |  | Obligations by TEMCO, LLC under credit agreement                                                                                                                                                                                    |  | None stated                                                                                                                                                                                |  | Credit agreement default                   |  | Subrogation against TEMCO, LLC                  |  | None                                                                                                                 
|North Valley Petroleum, LLC                                           |  | $                      | 194    |              |  |                     | 168    |                 |  | Obligations by North Valley Petroleum, LLC under
    credit agreement                                                                                                                                                               |  | None stated                                                                                                                                                                                |  | Credit agreement default                   |  | Subrogation against North Valley Petroleum, LLC |  | None                                                                                                                 
|Third parties                                                         |  |                        | *      |              |  |                     | 1,351  |                 |  | 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
|                                                                      |  |                        |        |              |  |                     |        |                 |  |                                                                                                                                                                                                                                     |  |                                                                                                                                                                                            |  |                                            |  |                                                 |  |                                                                                                                      
|                                                                      |  |                        |        |              |  | $                   | 48,859 |                 |  |                                                                                                                                                                                                                                     |  |                                                                                                                                                                                            |  |                                            |  |                                                 |  |                                                                                                                      
|                                                                      |  |                        |        |              |  |                     |        |                 |  |                                                                                                                                                                                                                                     |  |                                                                                                                                                                                            |  |                                            |  |                                                 |  |                                                                                                                      



---



|  |                                                                                                                                                                                                                                                                 
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | 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.

14



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##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward-Looking
Statements

The information in this Quarterly Report on
Form 10-Q for the quarterly period ended February 29,
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 of factors pursuant to the Act
should not be construed as exhaustive.

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

Changes in commodity
prices.Our revenues and earnings are
affected by market prices for commodities such as crude oil,
natural gas, grains, oilseeds, and flour. Commodity prices
generally are affected by a wide range of factors beyond our
control, including the 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 generally;
|
| |  | political instability or armed conflict in
    oil-producing regions;                                                                                       
|
| |  | the level of consumer demand;                                                                                                                               

15



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| |   |                                                             
| | - | ------------------------------------------------------------
| |  | 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 $324.0 million for the National Cooperative
Refinery Associations (NCRA) McPherson, Kansas refinery,
of which $21.4 million had been spent at the Laurel
refinery and $69.3 million had been spent by NCRA at the
McPherson refinery as of February 29, 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.

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.

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

16



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##### Table of Contents



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 in some quarters 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 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.

17



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##### Table of Contents



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 own a minority 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 but has been
unable to pass those increased costs on to its customers.

Technological improvements in agriculture
could decrease the demand for our agronomy
products.Technological advances in
agriculture could decrease the demand for crop nutrients, 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, as
well as the demand for fuel that we sell and which is used to
operate application equipment relating to these products.

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 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.

General

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, ranchers and their
local cooperatives from the Great Lakes to the Pacific Northwest
and from the Canadian border to Texas. CHS buys commodities
from, and provides products and services to members and other
customers. The Company provides a wide variety of products and
services, from initial agricultural inputs such as fuels, farm
supplies and crop nutrients, to agricultural outputs that
include grains and oilseeds, grain and oilseed processing, and
food products.

The Company has five distinct business segments:
Agronomy, Energy, Country Operations and Services, Grain
Marketing and Processed Grains and Foods. Summary data for each
of these segments for the three months and six months ended
February 29, 2004 and February 28, 2003 is shown in
Note 9 to the Consolidated Financial Statements.

18



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##### Table of Contents



Many of the Companys business activities
are highly seasonal, and as a result, 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 volumes 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 when gasoline and diesel usage
is highest. Other energy products, such as propane, experience
higher volumes and profitability during the winter heating and
fall 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 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 diseases or insects, drought, the availability and
adequacy of supply, government regulation 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, as equity income from investments, 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. These
investments principally include the Companys 25% ownership
in Agriliance, LLC (Agriliance), the 50% ownership in TEMCO,
LLC, the 50% ownership in United Harvest, LLC, the 24% ownership
in Horizon Milling, LLC (Horizon) and the 50% ownership in
Ventura Foods, LLC (Ventura).

Agriliance is owned and governed by Land
OLakes, Inc. (50%) and United Country Brands, LLC (50%).
United Country Brands, LLC is 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. Prior to the
transaction described below, 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.
Subsequent to the transaction, the Companys indirect
economic interest in Agriliance is no longer the same as the
Companys ownership or governance interest.

In April 2003, the Company acquired an additional
economic interest in the Agriliance wholesale crop protection
business (the CPP Business), which constitutes
only a part of the Agriliance business operations. The Company
acquired 13.1% of the CPP Business for a cash payment of
$34.3 million. The economic interests in Agriliance are
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 earnings are split
among the members based upon the respective economic interests
of each member.

In March 2004, the Company signed an agreement
for the sale of all of Farmlands interests in Agriliance,
LLC to the Company. The sale is contingent upon bankruptcy court
approval in the Farmland bankruptcy case. A bankruptcy court
hearing on the matter is scheduled for April 20, 2004. The
proposed purchase price is $27.5 million. Upon completion
of this transaction, the Company will own 50% of the economic
and governance interests in Agriliance, LLC.

In March 2004, NCRA purchased and sold a partial
interest in a crude oil pipeline, and will record a gain from
the sale of approximately $12.0 million during the
Companys third quarter. The effect on the Company will be
additional earnings of approximately 75% of the gain or
$9.0 million.

19



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##### Table of Contents



Results of Operations



| |                                                                                 
| | --------------------------------------------------------------------------------
| | Comparison of the three months ended
    February 29, 2004 and February 28, 2003

Net Income.Consolidated net income for the three months ended
February 29, 2004 was $8.5 million compared to a net
loss of $4.1 million for the three months ended
February 28, 2003, which represents a $12.6 million
increase in earnings. The most significant increases in
earnings, when comparing the three months ended
February 29, 2004 with the same period of a year ago, were
generated within the Companys Processed Grains and Foods,
and Agronomy segments. The Processed Grains and Foods segment
earnings increased $12.1 million, primarily as a result of
improved volumes and gross profits within the Companys
packaged foods joint venture. The Agronomy segment joint
ventures generated increased earnings of $7.3 million,
primarily a result of the 13.1% additional economic interest in
the CPP Business, as previously discussed.

Net Sales.Consolidated net sales of
$2.7 billion for the three months ended February 29,
2004 increased $326.4 million (14%) compared to the three
months ended February 28, 2003.

Company-wide grain and oilseed net sales of
$1.4 billion increased $246.6 million (21%) during the
three months ended February 29, 2004 compared with the
sales activity during the three months ended February 28,
2003. Sales consummated by the Grain Marketing segment totaled
$1,367.8 million and $1,104.3 million during the
periods ended February 29, 2004 and February 28, 2003,
respectively. Grain sales of the Country Operations and Services
segment to outside customers during these same periods were
$81.8 million and $98.7 million, respectively. Sales
of grain between the Country Operations and Services segment and
the Grain Marketing segment during those periods were
$280.0 million and $212.4 million, respectively. These
intersegment sales are included for segment reporting purposes,
but the Company eliminates all intersegment sales on a
consolidated basis. The net sales increase of
$246.6 million is attributable to higher grain prices and
increased volumes during the three month period ended
February 29, 2004 compared to those prevailing during the
same period a year earlier. In an analysis of this increase in
net sales, the weighted average sales price of all grain and
oilseed commodities sold reflected an increase of $0.44 per
bushel (11%) which contributed $131.4 million to the
increase. Commodity prices in general increased, in particular
the market price of soybeans increased $1.87 per bushel compared
to the three-months ended February 28, 2003. Volume
increased 9% during the three month period ended
February 29, 2004 compared with the same three month period
of a year ago, and had the affect of increasing sales by
$115.2 million. The largest volume increases were primarily
in soybeans and corn.

Energy net sales of $877.9 million increased
$0.9 million (less than 1%) during the three months ended
February 29, 2004 compared with the sales activity during
the three months ended February 28, 2003. During the three
months ended February 29, 2004 and February 28, 2003,
respectively, the Energy segment had sales to the Country
Operations and Services segment of $28.3 million and
$22.9 million, respectively. These intersegment sales are
eliminated in deriving consolidated sales but are included for
segment reporting purposes. The net sales increase of
$0.9 million is comprised of an increase of
$69.2 million related to price appreciation and a decrease
in sales of $68.3 million because of lower sales volume. On
a more product-specific basis, refined fuels prices increased
$0.05 per gallon and volumes decreased 9% when comparing the
three months ended February 29, 2004 with the same period a
year ago. Propane prices increased $0.10 per gallon and sales
volume remained consistent in comparison of the same two
periods. Refined fuel prices are generally reflective of crude
oil prices. Refined fuels volume decreases reflect a cutback on
unbranded sales during the second quarter to offset the effects
of the non-renewal of the supply agreement with a Coffeyville,
Kansas production facility. The higher propane prices reflect
lower industry stocks in 2003 as the result of a cold winter
earlier in the calendar year.

Country operations non-grain net sales of
$133.8 million increased by $14.0 million (12%) during
the three months ended February 29, 2004 compared to the
three months ended February 28, 2003 primarily in energy
products. Energy product sales increased primarily as the result
of an increase in the average selling price of propane compared
to the previous year.

20



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##### Table of Contents



Processed Grains and Foods segment net sales of
$193.3 million increased $64.9 million (51%) during
the three months ended February 29, 2004 compared to the
three months ended February 28, 2003. Oilseed processing
net sales increased $66.3 million primarily due to
additional volumes from a new crushing plant in Fairmont,
Minnesota that began operations during the first quarter of
fiscal year 2004. In addition, the average selling price of
processed oilseed and refined oilseed products increased $29 per
ton and $0.04 per pound, respectively.

Patronage Dividends.Patronage dividends received of $3.6 million increased
$2.8 million during the three months ended
February 29, 2004 compared to the three months ended
February 28, 2003. This increase is primary a result of a
patronage distribution in one of the Companys cooperative
investments, which was primarily related to gains on legal
settlements and on the sale of a warehouse facility.

Other Revenues.Other revenues of $30.8 million increased $4.1 million
(15%) during the three months ended February 29, 2004
compared to the three months ended February 28, 2003. The
most significant increase was in the Country Operations and
Services segment compared to the prior year.

Cost of Goods Sold.Cost of goods sold of $2.6 billion increased
$324.9 million (14%) during the three months ended
February 29, 2004 compared to the three months ended
February 28, 2003. The cost of all grains and oilseed
procured by the Company through its Grain Marketing and Country
Operations and Services segments increased 21% compared to the
three months ended February 28, 2003 primarily due to a
$0.46 (11%) average cost per bushel increase and a 9% increase
in volumes. This increase in cost of goods sold was primarily
the result of higher commodity prices and increased shipping
costs. The Energy segment cost of goods sold increased by
$5.8 million during the three months ended
February 29, 2004 compared to the same period of the prior
year, primarily due to increased average costs, which were
partially offset by reduced volumes. On a more product-specific
basis, refined fuels average cost increased by $0.05 per gallon,
which was partially offset by a 9% decrease in volumes compared
to the three months ended February 28, 2003. The average
cost increase on refined fuels is reflective of crude oil
prices. The average cost of propane increased $0.10 per gallon
while volumes stayed relatively consistent compared to the three
months ended February 28, 2003. Country operations
non-grain cost of goods sold increased by 6% during the three
months ended February 29, 2004 compared to the three months
ended February 28, 2003, primarily due to an increased
average cost per unit on propane products. The Processed Grains
and Foods segment cost of goods sold increased by
$65.2 million (54%) compared to the three months ended
February 28, 2003, which was primarily due to additional
volumes of soybeans processed at the new crushing plant in
Fairmont, Minnesota and an increased average cost of raw
materials in oilseed processing.

Marketing, General and
Administrative.Marketing, general and
administrative expenses of $52.8 million for the three
months ended February 29, 2004 increased by
$4.7 million (10%) compared to the three months ended
February 28, 2003. The primary increase during three months
ended February 29, 2004 compared to the prior year is
within the Energy segment.

Gain on Legal
Settlements.The Country Operations
and Services segment received cash of $8.9 million during
the three months ended February 28, 2003 from a class
action lawsuit alleging illegal price fixing against various
feed vitamin product suppliers.

Interest.Interest
expense of $13.5 million for the three months ended
February 29, 2004 increased by $2.0 million (18%)
compared to the three months ended February 28, 2003. The
average level of short-term borrowings increased
$188.5 million primarily due to financing higher average
working capital needs and was partially offset by an average
short-term interest rate decrease of 0.2% during the three
months ended February 29, 2004 compared to the three months
ended February 28, 2003.

Equity Income from
Investments.Equity income from
investments of $18.1 million for the three months ended
February 29, 2004 compares to an equity loss from
investments of $5.8 million for the three months ended
February 28, 2003 and increased $23.9 million. This
increase is primarily attributable to

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improved earnings within the Companys
Processed Grains and Foods segment of $12.3 million, the
Agronomy segment of $7.3 million, and the Grain Marketing
segment of $4.4 million.


The Processed Grains and Foods segment oilseed
based products and packaged foods joint venture (Ventura)
increase of $11.0 million is primarily improved sales
volume of 20% and an increase in gross profits as a percent of
sales.

The Agronomy segment joint ventures generated
increased earnings of $7.3 million. The improvement in
earnings is primarily a result of the 13.1% additional economic
interest in the CPP business, as previously discussed. However,
the crop nutrient volumes are down 28% compared to the prior
three-month period last year, which slightly increased the
overall equity loss that was recorded from the Agriliance
investment.

The Grain Marketing segments also shows
increased earnings in two exporting joint ventures primarily due
to increased demand from China, favorable ocean freight spreads
from the Pacific Northwest, where the exporting joint venture
facilities are located, to the Pacific Rim, a weaker
U.S. dollar and poor weather conditions in certain
competing grain exporting countries. These factors contributed
to a $1.9 million increase in equity income from the
Companys investment in TEMCO, LLC, a joint venture which
exports corn and soybeans. These same conditions contributed to
$2.1 million improvement in equity income from the
Companys wheat exporting investment in United Harvest, LLC.

Minority Interests.Minority interests of $3.2 million for the three months
ended February 29, 2004 decreased by $125 thousand (4%)
compared to the three months ended February 28, 2003. The
net change in minority interests during the three months ended
February 29, 2004 compared to the prior three-month period
last year was primarily a result of slightly less 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 $1.0 million for the three months ended
February 29, 2004 compares to an income tax benefit of
$3.2 million for the three months ended February 28,
2003. The federal and state statutory rate applied to
nonpatronage business activity was 38.9% for the periods ended
February 29, 2004 and February 28, 2003. The income
taxes and effective tax rate vary each period based upon
profitability and nonpatronage business activity during each of
the comparable periods.



| |                                                                               
| | ------------------------------------------------------------------------------
| | Comparison of the six months ended
    February 29, 2004 and February 28, 2003

Net Income.Consolidated net income for the six months ended
February 29, 2004 was $59.3 million compared to
$36.3 million for the six months ended February 28,
2003, which represents a $23.0 million (63%) increase in
earnings. The most significant increases in earnings, when
comparing the six months ended February 29, 2004 with the
same period of a year ago, were generated within the
Companys Processed Grains and Foods, and Agronomy
segments. The Processed Grains and Foods segment earnings
increased $16.4 million, primarily as a result of improved
volumes and gross profits within the Companys packaged
foods joint venture. Stronger soymeal margins resulted from
increased demand and because a competitors facility, which
operates in the same geographic area as the Companys
plants was inoperative during much of the period. Refined
soybean oil-based products generated improved margins primarily
due to increased volumes. The Agronomy segment joint ventures
generated increased earnings of $8.2 million for the
Company, primarily a result of the 13.1% additional economic
interest in the CPP business, as previously discussed. The
Energy segment also generated increased earnings of
$3.8 million, primarily as the result of strong refining
margins, and the Grain Marketing segment increased earnings of
$3.0 million, primarily related to improved equity income
for joint ventures.

Net Sales.Consolidated net sales of
$5.1 billion for the six months ended February 29,
2004 increased $415.2 million (9%) compared to the six
months ended February 28, 2003.

Company-wide grain and oilseed net sales of
$2.7 billion increased $278.5 million (11%) during the
six months ended February 29, 2004 compared with the sales
activity during the six months ended February 28, 2003.
Sales consummated by the Grain Marketing segment totaled
$2,573.0 million and

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$2,265.8 million during the periods ended
February 29, 2004 and February 28, 2003, respectively.
Grain sales of the Country Operations and Services segment to
outside customers during these same periods were
$153.1 million and $181.8 million, respectively. Sales
of grain between the Country Operations and Services segment and
the Grain Marketing segment during those periods were
$538.4 million and $463.8 million, respectively. These
intersegment sales are included for segment reporting purposes,
but the Company eliminates all intersegment sales on a
consolidated basis. The net sales increase of
$278.5 million is attributable to higher grain prices and
increased volumes during the six month period ended
February 29, 2004 compared to those prevailing during the
same period a year earlier. In an analysis of this increase in
net sales, the weighted average sale price of all grain and
oilseed commodities sold reflected an increase of $0.33 per
bushel (8%) which contributed $194.4 million to the
increase. Commodity prices in general increased, in particular,
the market price per bushel of soybeans, corn and wheat were
$3.66, $0.65 and $0.58 greater than the respective prices for
the six months ended February 28, 2004. Volumes increased
3% during the six-month period ended February 29, 2004
compared with the same six-month period of a year ago, and
contributed $84.1 million to the increase. Soybeans
reflected the largest volume increase, which was partially
offset by a volume decrease in corn.


Energy net sales of $1.8 billion increased
$2.2 million (less than 1%) during the six months ended
February 29, 2004 compared with the sales activity during
the six months ended February 28, 2003. During the six
months ended February 29, 2004 and February 28, 2003,
the Energy segment had sales to the Country Operations and
Services segment of $55.4 million and $46.9 million,
respectively. These intersegment sales are eliminated in
deriving consolidated sales but are included for segment
reporting purposes. The net sales increase of $2.2 million
is comprised of an increase of $141.7 million related to
price appreciation and a decrease in sales of
$139.5 million because of lower sales volume. On a more
product-specific basis, refined fuels prices increased $0.05 per
gallon and volumes decreased 5% when comparing the six months
ended February 29, 2004 with the same period a year ago.
Propane prices increased $0.12 per gallon and sales volume
decreased 8% in comparison of the same two periods. Refined fuel
prices are generally reflective of crude oil prices. The higher
propane prices reflect lower industry stocks in 2003 as the
result of a cold winter earlier in the calendar year. The lower
sales volume for propane during the six months ended
February 29, 2004 is primarily reflective of a dry autumn
which offered minimal opportunity for corn drying (propane is
used as the fuel for corn dryers) and a relatively warm early
winter which reduces its demand for home heating.

Country operations non-grain net sales of
$307.1 million increased by $32.8 million (12%) during
the six months ended February 29, 2004 compared to the six
months ended February 28, 2003 primarily in energy and
agronomy products. Fertilizer volume and the net average sales
price increased compared to the previous year. Energy product
sales increased primarily as the result of an increase in the
average selling price of propane compared to the previous year.

Processed Grains and Foods segment net sales of
$343.9 million increased $101.8 million (42%) during
the six months ended February 29, 2004 compared to the six
months ended February 28, 2003. The volume increase is
primarily due to additional volumes at a new crushing plant in
Fairmont, Minnesota that began operations during the first
quarter of fiscal year 2004. The average selling price of
processed oilseed and refined oilseed products increased $49 per
ton and $0.05 per pound, respectively.

Patronage Dividends.Patronage dividends received of $4.0 million increased
$3.0 million during the six months ended February 29,
2004 compared to the six months ended February 28, 2003.
This increase is primary a result of a patronage distribution in
one of the Companys cooperative investments which,
primarily related to gains on legal settlements and on the sale
of a warehouse facility.

Other Revenues.Other revenues of $63.5 million increased $3.5 million
(6%) during the six months ended February 29, 2004 compared
to the six months ended February 28, 2003. The most
significant increase was in the Country Operations and Services
segment compared to the prior year.

Cost of Goods Sold.Cost of goods sold of $5.0 billion increased
$402.6 million (9%) during the six months ended
February 29, 2004 compared to the six months ended
February 28, 2003. The cost of all grains and oilseed
procured by the Company through its Grain Marketing and Country
Operations and

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Services segments increased $279.9 million
(12%) compared to the six months ended February 28, 2003,
primarily due to a $0.34 (8%) average cost per bushel increase
and a 3% increase in volumes compared to the prior year. This
increase in cost of goods sold was primarily the result of
higher commodity prices. The Energy segment cost of goods sold
increased by $7.2 million (less than 1%) during the six
months ended February 29, 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 $0.05 per gallon, which was partially offset by a
5% decrease in volumes compared to the six months ended
February 28, 2003. The average cost increase on refined
fuels is reflective of crude oil prices. The average cost of
propane increased $0.12 per gallon, which was partially offset
by an 8% decrease in volumes compared to the six months ended
February 28, 2003. Volumes of propane products were reduced
due to a dry autumn, which was partially offset by an average
cost increase due to higher input costs compared to the six
months ended February 28, 2003. Country operations
non-grain cost of goods sold increased by 10% during the six
months ended February 29, 2004 compared to the six months
ended February 28, 2003, primarily due to an increased
average cost per unit on fertilizer and propane products. The
Processed Grains and Foods segment cost of goods sold increased
by $99.2 million (44%) compared to the six months ended
February 28, 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 $100.5 million for the six
months ended February 29, 2004 increased by
$9.3 million (10%) compared to the six months ended
February 28, 2003. The net increase includes additional
expenses within the Energy and Country Operations and Services
segments.

Gain on Legal
Settlements.The Country Operations
and Services segment received cash of $10.7 million during
the six months ended February 28, 2003 from a class action
lawsuit alleging illegal price fixing against various feed
vitamin product suppliers.

Interest.Interest
expense of $25.0 million for the six months ended
February 29, 2004 increased by $773 thousand (3%) compared
to the six months ended February 28, 2003. The average
level of short-term borrowings increased $55.8 million
primarily due to financing higher average working capital needs
and was partially offset by an average short-term interest rate
decrease of 0.4% during the six months ended February 29,
2004 compared to the six months ended February 28, 2003.

Equity Income from
Investments.Equity income from
investments of $31.8 million for the six months ended
February 29, 2004 compares to $2.4 million for the six
months ended February 28, 2003 and increased
$29.4 million. This increase is primarily attributable to
improved earnings within the Companys Processed Grains and
Foods segment of $16.1 million, the Agronomy segment of
$8.2 million, and the Grain Marketing segment of
$5.6 million.

The Processed Grains and Foods segment oilseed
based products and packaged foods joint venture (Ventura)
increase is primarily improved sales volume of 20% and an
increase in gross profits as a percent of sales.

The Agronomy segment joint ventures generated
increased earnings of $8.2 million. The improvement in
earnings is primarily a result of the 13.1% additional economic
interest in the CPP business, as previously discussed. However,
the crop nutrient volumes are down 26% over last year, which
slightly increased the overall equity loss that was recorded
from the Agriliance investment.

The Grain Marketing segments also shows
increased earnings in two exporting joint ventures primarily due
to increased demand from China, favorable ocean freight spreads
from the Pacific Northwest, where the exporting facilities are
located to the Pacific Rim, a weaker U.S. dollar and poor
weather conditions in certain competing grain exporting
countries. These factors contributed to a $2.7 million
increase in equity income from the Companys investment in
TEMCO, LLC, a joint venture which exports corn and soybeans.
These same conditions contributed to $2.5 million
improvement in equity income from the Companys wheat
exporting investment in United Harvest, LLC.

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Minority Interests.Minority interests of $7.1 million for the six months ended
February 29, 2004 decreased by $1.6 million (19%)
compared to the six months ended February 28, 2003. The net
change in minority interests during the six months ended
February 29, 2004 compared to the prior six-month period
last year was primarily a result of less 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 $8.6 million for the six months ended
February 29, 2004 compares to $2.3 million for the six
months ended February 28, 2003, resulting in effective tax
rates of 12.7% and 5.9%, respectively. The federal and state
statutory rate applied to nonpatronage business activity was
38.9% for the periods ended February 29, 2004 and
February 28, 2003. The income taxes and effective tax rate
vary each period based upon profitability and nonpatronage
business activity during each of the comparable periods.

Liquidity and Capital Resources

On February 29, 2004, the Company had
working capital, defined as current assets less current
liabilities, of $475.2 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. On
February 28, 2003, the Company had working capital of
$522.8 million and a current ratio of 1.4 to 1.0, compared
to working capital of $249.1 million and a current ratio of
1.2 to 1.0 on August 31, 2002. In October 2002, the Company
borrowed $175.0 million from a group of insurance companies
on a long-term basis and in January 2003 received net proceeds
of $82.5 million from the sale of preferred stock to the
general public. This financing was initiated in part to fund
capital expenditures related to the low sulfur fuel regulations
discussed below in Cash Flows from Investing Activities. The
Company had previously established committed lines of revolving
credit totaling $715.0 million, of which
$600.0 million was drawn on February 29, 2004,
primarily for the purpose of financing receivables and
inventories. These receivables and inventories are highly
liquid. In addition to these lines of revolving credit, the
Company established additional uncommitted lines of credit
during the second fiscal quarter of 2004 totaling
$100.0 million through CoBank, ACB, of which
$50.0 million expires in May 2004 and $50.0 million
expires in May 2005. The terms of this new revolving credit are
the same as under the existing lines of credit. Recent commodity
prices have increased significantly, in particular soybeans, and
the Company believes that obtaining the additional financing was
prudent in order to ensure adequate liquidity to cover any
increase in net operating assets and liabilities. There was no
outstanding balance on the additional facilities on
February 29, 2004.



| |                           
| | --------------------------
| | 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 were described in the cautionary statement above,
and may affect net operating assets and liabilities and
liquidity.

Cash flows used in operating activities were
$365.2 million and $107.4 million for the six months
ended February 29, 2004 and February 28, 2003,
respectively. Volatility in cash flows from operations for these
periods is primarily the result of changing grain and crude oil
prices as well as inventory quantities. On February 29,
2004, the market prices per bushel of spring wheat, soybeans and
corn, were $0.65 (17%), $3.43 (57%), and $.51 (21%) greater than
their respective values on August 31, 2003. Crude oil
prices on February 29, 2004 increased $4.59 per barrel
(15%) when compared to August 31, 2003. These increases in
grain and crude oil prices, as well as larger inventory
quantities in the Country Operations and Services segment, had
the affect of contributing significantly to an increase in net
operating assets and liabilities values compared with those on
August 31, 2003, thus using cash resources. The larger
inventory quantities are due to grain inventory from fall
harvest not delivered to sale destinations partly related to
railcar shortages, and agronomy inventory related to the
upcoming spring planting season. In contrast, on
February 28, 2003, the market prices per bushel of spring
wheat, soybeans and corn were $1.38 (27%),

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$0.18 (3%) and $0.28 (11%) lower than their
respective values on August 31, 2002. The decreases in
grain prices on February 28, 2003 when compared to
August 31, 2002, had the affect of decreasing operating
assets and liabilities, but were offset by other factors that
increased net operating assets and liabilities. Factors that
increased net operating assets and liabilities included an
increase in crude oil prices of $7.62 per barrel (26%), as well
as larger inventory quantities in the Country Operations and
Services segment related to agronomy products for the spring
planting season and somewhat related to grain inventory from the
fall harvest. All of the above factors, when combined, had the
effect of increasing operating assets and liabilities values
compared with those on August 31, 2002, thus using cash
resources.


Operating activities of the Company used net cash
of $365.2 million during the six months ended
February 29, 2004. Net income of $59.3 million and net
non-cash expenses of $27.1 million were offset by an
increase in net operating assets and liabilities of
$451.6 million. The primary components of net non-cash
expenses included depreciation and amortization of
$53.9 million and a partial offset of net income from
equity investments of $31.8 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, an increase in crude oil prices and
increased inventory quantities, as explained in the previous
paragraph. These and other less significant factors increased
net operating assets and liabilities by $451.6 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.

Operating activities of the Company used net cash
of $107.4 million during the six months ended
February 28, 2003. Net income of $36.3 million and net
non-cash expenses of $59.5 million were partially offset by
an increase in net operating assets and liabilities
$203.2 million. The primary components of net non-cash
expenses included depreciation and amortization of
$51.6 million, minority interests of $8.8 million and
a partial offset of net income from equity investments of
$2.4 million. The increase in net operating assets and
liabilities was primarily due to an increase in crude oil prices
and larger inventory quantities related to the seasonality of
the agronomy business and grain harvest, as explained
previously. This increase in net operating assets and
liabilities of $203.2 million represented the largest use
of cash generated through operations.

Operating activities of the Company used net cash
of $204.7 million during the three months ended
February 29, 2004. Net income of $8.5 million and net
non-cash expenses of $10.2 million were offset by an
increase in net operating assets and liabilities of
$223.4 million. The primary components of net non-cash
expenses included depreciation and amortization of
$27.0 million and a partial offset of net income from
equity investments of $18.1 million. The increase in net
operating assets and liabilities was caused primarily by
prepayments to suppliers of agronomy product inventories at the
Companys country operations locations partially offset by
the collection of prepayments from the Companys own
customers for these products. In addition, there was a decrease
in payables as the Company used cash to pay deferred payment
contracts for those producers that sold their grain to the
Company during the prior quarter and requested cash payment
after the end of the calendar year. These and other less
significant factors increased net operating assets and
liabilities by $223.4 million and was the largest use of
cash from operations.

Operating activities of the Company used net cash
of $122.5 million during the three months ended
February 28, 2003. A net loss of $4.1 million and an
increase in net operating assets and liabilities of
$154.0 million were partially offset by net non-cash
expenses of $35.6 million. The primary components of net
non-cash expenses included depreciation and amortization of
$25.8 million and a loss from equity investments of
$5.8 million. The increase in net operating assets and
liabilities was primarily due to a decrease in payables as the
Company used cash to pay deferred payment contracts for those
producers that sold their grain to the Company during the prior
quarter and requested cash payment after the end of the calendar
year. In addition, there was an increase in prepayments to
suppliers of agronomy product inventories at the Companys
country operations locations partially offset by the collection
of prepayments

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from the Companys own customers for these
products. This increase in net operating assets and liabilities
of $122.5 million represented the largest use of cash
generated through operations.


The Company expects that railcars will continue
to be in short supply during the next quarter to transport grain
from its country elevator locations to sale destinations.
Inventories at most of the Companys country operations
elevators are already at near maximum capacity; consequently
this situation is likely not to contribute to an increase in net
operating assets and liabilities, but rather these inventories
will not be reduced at the pace normally experienced. The
Company also expects to decrease agronomy product inventories at
its country operations locations during the next fiscal quarter
as the spring planting season takes place, which will have the
effect of decreasing operating assets and liabilities.



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

For the three months ended February 29, 2004
and February 28, 2003, the net cash flows used in the
Companys investing activities totaled $23.3 million
and $18.2 million, respectively.

The acquisition of property, plant and equipment
comprised the primary use of cash totaling $50.0 million
and $36.8 million for the three months ended
February 29, 2004 and February 28, 2003, respectively.
For the year ended August 31, 2004 the Company expects to
spend approximately $252.7 million for the acquisition of
property, plant and equipment. Capital expenditures started in
fiscal year 2002, 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
$324.0 million for NCRAs McPherson, Kansas refinery,
of which $21.4 million has been spent at the Laurel
refinery and $69.3 million has been spent by NCRA at the
McPherson refinery as of February 29, 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.

Investments made during the three months ended
February 29, 2004 and February 28, 2003 totaled
$1.0 million and $2.8 million, respectively.

Partially offsetting cash outlays in investing
activities were proceeds from the disposition of property, plant
and equipment of $8.1 million and $7.2 million for the
three months ended February 29, 2004 and February 28,
2003, respectively. Also partially offsetting cash usages were
distributions received from joint ventures and investments
totaling $18.7 million and $14.5 million for the three
months ended February 29, 2004 and February 28, 2003,
respectively.

For the six months ended February 29, 2004
and February 28, 2003, the net cash flows used in the
Companys investing activities totaled $27.9 million
and $63.1 million, respectively.

The acquisition of property, plant and equipment
comprised the primary use of cash totaling $102.2 million
and $77.4 million for the six months ended
February 29, 2004 and February 28, 2003, respectively.
For the six months ended February 28, 2003, the
acquisitions of property, plant and equipment included
$8.5 million acquired as part of a business. Construction
of an oilseed processing facility in Fairmont, Minnesota was
essentially complete during the first quarter of fiscal 2004
when the facility became operational. Also during the first
quarter of fiscal 2004, the Company entered into a sale
leaseback transaction for the facility equipment and received
cash proceeds of $19.8 million from the sale.

Investments made during the six months ended
February 29, 2004 and February 28, 2003 totaled
$1.0 million and $4.2 million, respectively.

Acquisitions of intangibles were
$0.4 million for the six months ended February 29,
2003, and net working capital acquired in business acquisitions
was $13.0 million during the same period.

During the six months ended February 29,
2004 and February 28, 2003, the changes in notes receivable
resulted in decreases in cash flows of $5.9 million and
$11.5 million, respectively, primarily from related party
notes receivables at NCRA from its minority owners, Growmark,
Inc. and MFA Oil Company.

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Distributions to minority owners for the six
months ended February 29, 2004 and February 28, 2003,
were $1.3 million and $0.5 million, respectively, and
primarily relate to NCRA. Cash distributions NCRA has made to
its members decreased since 2002, 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 $29.7 million and $11.9 million for
the six months ended February 29, 2004 and
February 28, 2003, respectively. During the six months
ended February 29, 2004, proceeds of $19.8 million
were from a sale leaseback transaction previously discussed.
Also partially offsetting cash usages were distributions
received from joint ventures and investments totaling
$49.6 million and $31.5 million for the six months
ended February 29, 2004 and February 28, 2003,
respectively.



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

The Company finances its working capital needs
through short-term lines of credit with a syndication of banks.
In May 2003, the Company entered into a 364-day credit facility
of $600.0 million committed. 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 February 29, 2004,
August 31, 2003 and February 28, 2003, the Company had
total short-term indebtedness outstanding on these various
facilities and other short-term notes payable totaling
$600.0 million, $251.1 million and
$370.6 million, respectively. The increase in short-term
notes payable on February 29, 2004 was primarily due to
increased grain and crude oil prices as well as larger inventory
quantities on February 29, 2004 compared to August 31,
2003. In addition to these lines of revolving credit, the
Company established additional uncommitted lines of credit
during the second fiscal quarter totaling $100.0 million
through CoBank, ACB, of which $50.0 million expires in May
2004 and $50.0 million expires in May 2005. The terms of
this new revolving credit are the same as under the existing
lines of credit. There was no outstanding balance on these
additional credit facilities on February 29, 2004. Recent
commodity prices have increased significantly, in particular
soybeans, and the Company believes that obtaining the additional
short-term financing was prudent in order to ensure adequate
liquidity to cover any increase in net operating assets and
liabilities. 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
$45.0 million on February 28, 2003. Repayments of
$30.0 million were made on this facility during the three
months ended February 28, 2003.

In May 2003, the Company established a three-year
revolving credit facility with a syndication of banks, with
$100.0 million committed. There was no outstanding balance
on this credit facility on February 29, 2004 or
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 $134.5 million,
$137.8 million and $141.0 million on February 29,
2004, August 31, 2003 and February 28, 2003,
respectively. Interest rates on February 29, 2004 ranged
from 2.10% to 7.13%. Repayments of $1.6 million and
$3.3 million were made on this facility during each of the
three months and six months ended February 29, 2004 and
February 28, 2003.

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 will be made in equal annual
installments of $37.5 million each in the years 2008
through 2013.

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In January 2001, the Company entered into a note
purchase and private shelf agreement with Prudential Insurance
Company (Prudential). The long-term note in the amount of
$25.0 million has an interest rate of 7.9% and will be
repaid 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 of 7.43% and will be repaid in equal annual
installments of approximately $7.9 million, in the years
2005 through 2011.

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 will be repaid 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 will be repaid in equal
semi-annual installments of approximately $4.6 million
during fiscal years 2012 through 2018.

The Company, through NCRA, had revolving term
loans outstanding of $13.5 million, $15.0 million and
$16.5 million on February 29, 2004, August 31,
2003 and February 28, 2003, respectively. Interest rates on
February 29, 2004 ranged from 6.48% to 6.99%. Repayments of
approximately $0.8 million and $1.5 million were made
during each of the three months and six months ended
February 29, 2004 and February 28, 2003.

On February 29, 2004, the Company had total
long-term debt outstanding of $655.6 million, of which
$162.0 million was bank financing, $480.0 million was
private placement proceeds and $13.6 million was industrial
development revenue bonds and other notes and contracts payable.
The aggregate amount of long-term debt payable presented in the
Managements Discussion and Analysis in the Companys
Annual Report on Form 10-K for the year ended
August 31, 2003 has not materially changed during the three
months and six months ended February 29, 2004. The
Companys long-term debt is unsecured except for other
notes and contracts in the amount of $5.3 million; however,
restrictive covenants under various agreements have requirements
for maintenance of minimum working capital levels and other
financial ratios. The Company is in compliance with all debt
covenants and restrictions as of February 29, 2004.

During the three months ended February 29,
2004 and February 28, 2003, the Company borrowed on a
long-term basis $0.4 million and no dollars, respectively,
and during the same periods repaid long-term debt of
$4.5 million and $33.4 million, respectively.

During the six months ended February 29,
2004 and February 28, 2003, the Company borrowed on a
long-term basis $0.4 million and $175.0 million,
respectively, and during the same periods repaid long-term debt
of $8.3 million and $37.3 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 distributed during
the three months ended February 29, 2004. The cash portion
of this distribution, deemed by the Board of Directors to be 30%
was $28.2 million. During the three months ended
February 28, 2003 the Company distributed cash patronage of
$26.4 million from the patronage earnings of the fiscal
year ended August 31, 2002.

The current equity redemption policy, as
authorized by the Board of Directors, allows for the redemption
of capital equity certificates held by inactive direct members
and patrons and active direct members and patrons at age 72 or
death that were of age 61 or older on June 1, 1998. Such
redemptions are at the discretion of the Board of Directors. For
active direct members and patrons who were of age 60 or younger
on June 1, 1998, and member cooperatives, equities older
than 10 years may be redeemed annually based on a prorata
formula where the numerator is dollars available for such
purpose as determined by the Board of Directors, and the
denominator is the sum of the patronage certificates older than
10 years held by such eligible members and patrons. Total
cash redemptions related to the year

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ended August 31, 2003, to be distributed in
fiscal year 2004, are expected to be approximately
$10.8 million, of which $1.6 million was redeemed
during the three months ended February 29, 2004 compared to
$21.9 million during the three months ended
February 28, 2003 and $2.9 million was redeemed during
the six months ended February 29, 2004 compared to
$24.4 million during the six months ended February 28,
2003. An additional $13.0 million of capital equity
certificates were redeemed in March 2004 in exchange for 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 for one
share of the stock on the NASDAQ National Market on
March 2, 2004. After the exchange, the number of shares of
New Preferred outstanding was 4,227,414. As of February 29,
2004 the Company had $93.7 million (3,748,099 shares) of
the New Preferred outstanding.


In 2001 and 2002 the Company issued approximately
$9.5 million (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 Company issued 3,450,000
shares of 8% Cumulative Redeemable Preferred Stock (New
Preferred) at a price of $25.00 per share, for proceeds of
$86.3 million, which are listed on the NASDAQ National
Market. The Board of Directors intent is to pay quarterly
dividends. 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 $7.5 million (7,452,439 shares), and
the balance of the Old Preferred (2,002,435 shares) was redeemed
in cash at $1.00 per share.

Off Balance Sheet Financing
Arrangements

Lease
Commitments:

The Companys lease commitments presented in
Managements Discussion and Analysis in the Companies
Annual Report on Form 10-K for the year ended
August 31, 2003 have not materially changed during the six
months ended February 29, 2004.

Guarantees:

The Company is a guarantor for lines of credit
for related companies of which $48.9 million was
outstanding on February 29, 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 February 29, 2004.

Debt:

There is no material off balance sheet debt.

Critical Accounting Policies

The Companys Critical Accounting Policies
are presented in the Companys Annual Report on
Form 10-K, as amended, for the year ended August 31,
2003. There have been no changes to these policies during the
six months ended February 29, 2004.

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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. During fiscal 2003, the Company opened a grain
marketing office in Brazil that impacts its exposure to foreign
currency fluctuations, but to date, there has been no material
effect.

Recent Accounting Pronouncements

On December 23, 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 June 15, 2004. All other provisions under this
Statement are effective for fiscal years ending after
December 15, 2003 and interim periods beginning after
December 15, 2003. The Company will adopt the interim
provisions of this Statement beginning in the third quarter of
2004. All other provisions of this Statement will be adopted in
the fourth quarter of 2004.

On January 12, 2004, the FASB issued a FASB
Staff Position (FSP) regarding SFAS No. 106,
Employers Accounting for Postretirement Benefits
Other Than Pensions. FSP 106-1, 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 106-1 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 currently. 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 and the appropriate accounting. The Companys
measures of APBO and net periodic postretirement benefit costs
as of and for the quarter ended February 29, 2004 do not
reflect the effect of the Act as permitted by the FSP.

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. The Company has not finalized its assessments and has
not yet determined what the effects of adopting this standard
will have on the Company.

In May 2003, the 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). Many of those instruments
were previously classified as equity. 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 any effect on the Company.

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|        |                                                               
|------- | --------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures
    about Market Risk

For the period ended February 29, 2004 the
Company did not experience any adverse changes in market risk
exposures that materially affect the quantitative and
qualitative disclosures presented in the Companys Annual
Report on Form 10-K, as amended, for the year ended
August 31, 2003.






|        |                        
|------- | -----------------------
|Item 4. | 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
February 29, 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 the second quarter ended February 29,
2004, 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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PART II. OTHER INFORMATION




Item 6.     Exhibits
and Reports on Form 8-K

(a) Exhibits

|        |    |             |  |                                                                                                                                                                                                            
|------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    | Description
|        |    |            
|        | 10 | .1          |  | 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.
|        | 10 | .2          |  | Master Loan Agreement as of January 22, 2004
    between CoBank, ACB and CHS Inc.                                                                                                                          
|        | 10 | .3          |  | Uncommitted Revolving Credit Supplement to Master
    Loan Agreement dated January 22, 2004 entered into as of
    March 4, 2004 ($50 million, term up to and including
    May 21, 2004)                  
|        | 10 | .4          |  | Uncommitted Revolving Credit Supplement to Master
    Loan Agreement dated January 22, 2004 entered into as of
    March 4, 2004 ($50 million, term up to and including
    May 1, 2005)                   
|        | 31 | .1          |  | Certification Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002                                                                                                                                
|        | 31 | .2          |  | Certification Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002                                                                                                                                
|        | 32 | .1          |  | Certification Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002                                                                             
|        | 32 | .2          |  | Certification Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002                                                                             

(b) Reports on Form 8-K

None.

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SIGNATURES

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



| |                             
| | ----------------------------
| | CHS INC.                    
| | (Registrant)                
|
| | /s/ JOHN SCHMITZ            
| |                             
| | John Schmitz                
| | Executive Vice President and
| | Chief Financial Officer     

April 7, 2004

(Date)


34