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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
    November 30, 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 area code)  |  | (Registrants telephone number,
    including zip 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 November 30, 2004        
|      |  |                             
|NONE  |  | NONE                        









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INDEX

|                                      |  |                                                                                                                 |    |          |    | 
|------------------------------------- |  | --------------------------------------------------------------------------------------------------------------- | -- | -------- | -- | 
|                                      |  |                                                                                                                 |    | Page No. |   
|                                      |  |                                                                                                                 |    |          |   
|PART I. FINANCIAL
    INFORMATION    
|Item 1.                               |  | Financial Statements                                                                                            |    |          | 3  | 
|                                      |  | Consolidated Balance Sheets
    as of November 30, 2004, August 31, 2004 and
    November 30, 2003 (unaudited)  |    |          | 3  | 
|                                      |  | Consolidated Statements of
    Operations for the three months ended November 30, 2004 and
    2003 (unaudited) |    |          | 4  | 
|                                      |  | Consolidated Statements of
    Cash Flows for the three months ended November 30, 2004 and
    2003 (unaudited) |    |          | 5  | 
|                                      |  | Notes to Consolidated
    Financial Statements (unaudited)                                                      |    |          | 6  | 
|                                     
|Item 2.                               |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations                       |    |          | 14 | 
|                                     
|Item 3.                               |  | Quantitative and Qualitative
    Disclosures about Market Risk                                                  |    |          | 29 | 
|                                     
|Item 4.                               |  | Controls and Procedures                                                                                         |    |          | 29 | 
|                                     
|PART II. OTHER
    INFORMATION       
|                                     
|Item 6.                               |  | Exhibits and Reports on Form
    8-K                                                                            |    |          | 31 | 
|                                     
|SIGNATURE
    PAGE                    |  |                                                                                                                 | 32 |         
|Certification Pursuant to Section 302
|Certification Pursuant to Section 302
|Certification Pursuant to Section 906
|Certification Pursuant to Section 906



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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 November 30, 2004.

2



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

CHS INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS


(Unaudited)


|                                   |                                   |                                |           |         |            |  |           |              |           |  |           |           |           | 
|---------------------------------- | --------------------------------- | ------------------------------ | --------- | ------- | ---------- |  | --------- | ------------ | --------- |  | --------- | --------- | --------- | 
|                                   |                                   | November 30,                   |           |         | August 31, |  |           | November 30, |          
|                                   |                                   | 2004                           |           |         | 2004       |  |           | 2003         |          
|                                   |                                   |                                |           |         |            |  |           |              |          
|                                   |                                   |                               
|                                   |                                   | (dollars in thousands)         |          
|ASSETS                            
|Current assets:                    |                                   |                                |           |         |            |  |           |              |           |  |           |          
|                                   | Cash and cash equivalents         |                                | $         | 166,847 |            |  | $         | 136,491      |           |  | $         | 119,086   |          
|                                   | Receivables                       |                                |           | 849,812 |            |  |           | 834,965      |           |  |           | 818,632   |          
|                                   | Inventories                       |                                |           | 841,273 |            |  |           | 723,893      |           |  |           | 1,022,523 |          
|                                   | Other current assets              |                                |           | 257,923 |            |  |           | 273,355      |           |  |           | 292,669   |          
|                                   |                                   |                                |           |         |            |  |           |              |          
|                                   |                                   | Total current assets           |           |         | 2,115,855  |  |           |              | 1,968,704 |  |           |           | 2,252,910 | 
|Investments                        |                                   |                                | 535,927   |         |            |  | 575,816   |              |           |  | 519,107   |          
|Property, plant and equipment      |                                   |                                | 1,283,033 |         |            |  | 1,249,655 |              |           |  | 1,135,351 |          
|Other assets                       |                                   |                                | 242,083   |         |            |  | 237,117   |              |           |  | 248,915   |          
|                                   |                                   |                                |           |         |            |  |           |              |          
|                                   |                                   | Total assets                   |           | $       | 4,176,898  |  |           | $            | 4,031,292 |  |           | $         | 4,156,283 | 
|                                   |                                   |                                |           |         |            |  |           |              |          
|                                  
|LIABILITIES AND EQUITIES          
|Current liabilities:               |                                   |                                |           |         |            |  |           |              |           |  |           |          
|                                   | Notes payable                     |                                | $         | 1,083   |            |  | $         | 116,115      |           |  | $         | 376,846   |          
|                                   | Current portion of long-term debt |                                |           | 35,076  |            |  |           | 35,117       |           |  |           | 17,437    |          
|                                   | Customer credit balances          |                                |           | 93,095  |            |  |           | 88,686       |           |  |           | 72,254    |          
|                                   | Customer advance payments         |                                |           | 112,557 |            |  |           | 64,042       |           |  |           | 168,370   |          
|                                   | Checks and drafts outstanding     |                                |           | 51,228  |            |  |           | 64,584       |           |  |           | 83,110    |          
|                                   | Accounts payable                  |                                |           | 840,743 |            |  |           | 717,501      |           |  |           | 700,885   |          
|                                   | Accrued expenses                  |                                |           | 259,315 |            |  |           | 305,650      |           |  |           | 281,593   |          
|                                   | Dividends and equities payable    |                                |           | 105,842 |            |  |           | 83,569       |           |  |           | 63,082    |          
|                                   |                                   |                                |           |         |            |  |           |              |          
|                                   |                                   | Total current liabilities      |           |         | 1,498,939  |  |           |              | 1,475,264 |  |           |           | 1,763,577 | 
|Long-term debt                     |                                   |                                | 767,392   |         |            |  | 648,701   |              |           |  | 642,187   |          
|Other liabilities                  |                                   |                                | 149,357   |         |            |  | 148,526   |              |           |  | 118,204   |          
|Minority interests in subsidiaries |                                   |                                | 137,017   |         |            |  | 130,715   |              |           |  | 116,181   |          
|Commitments and contingencies      |                                   |                                |           |         |            |  |           |              |           |  |           |          
|Equities                           |                                   |                                | 1,624,193 |         |            |  | 1,628,086 |              |           |  | 1,516,134 |          
|                                   |                                   |                                |           |         |            |  |           |              |          
|                                   |                                   | Total liabilities and equities |           | $       | 4,176,898  |  |           | $            | 4,031,292 |  |           | $         | 4,156,283 | 
|                                   |                                   |                                |           |         |            |  |           |              |          

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

3



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##### Table of Contents



CHS INC. AND SUBSIDIARIES




CONSOLIDATED STATEMENTS OF
OPERATIONS

(Unaudited)


|                                      |                |                            |           |           |              |   |           |           | 
|------------------------------------- | -------------- | -------------------------- | --------- | --------- | ------------ | - | --------- | --------- | 
|                                      |                |                           
|                                      |                | For the Three Months Ended |          
|                                      |                |                            |          
|                                      |                | November 30,               |           |           | November 30, |  
|                                      |                | 2004                       |           |           | 2003         |  
|                                      |                |                            |           |           |              |  
|                                      |                |                           
|                                      |                | (dollars in thousands)     |          
|Revenues:                             |                |                            |           |           |              |   |           |          
|                                      | Net sales      |                            | $         | 2,937,248 |              |   | $         | 2,489,344 | 
|                                      | Other revenues |                            |           | 44,524    |              |   |           | 33,033    | 
|                                      |                |                            |           |           |              |  
|                                      |                |                            | 2,981,772 |           |              |   | 2,522,377 |          
|Cost of goods sold                    |                |                            | 2,872,733 |           |              |   | 2,416,713 |          
|Marketing, general and administrative |                |                            | 47,916    |           |              |   | 45,836    |          
|                                      |                |                            |           |           |              |  
|Operating earnings                    |                |                            | 61,123    |           |              |   | 59,828    |          
|Gain on legal settlements             |                |                            |           |           |              |   | (287      | )        
|Interest                              |                |                            | 11,594    |           |              |   | 11,540    |          
|Equity income from investments        |                |                            | (16,683   | )         |              |   | (13,707   | )        
|Loss on impairment of investment      |                |                            | 35,000    |           |              |   |           |          
|Minority interests                    |                |                            | 8,189     |           |              |   | 3,922     |          
|                                      |                |                            |           |           |              |  
|Income before income taxes            |                |                            | 23,023    |           |              |   | 58,360    |          
|Income taxes                          |                |                            | 5,027     |           |              |   | 7,621     |          
|                                      |                |                            |           |           |              |  
|Net income                            |                | $                          | 17,996    |           |              | $ | 50,739    |          
|                                      |                |                            |           |           |              |  

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

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CHS INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH
FLOWS


(Unaudited)


|                                                         |                                                                                                 |                                                 |                                       |                                                         |              |          |         |         |         |          |          |  
|-------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | ----------------------------------------------- | ------------------------------------- | ------------------------------------------------------- | ------------ | -------- | ------- | ------- | ------- | -------- | -------- | -
|                                                         |                                                                                                 |                                                
|                                                         |                                                                                                 | For the Three Months Ended                      |                                      
|                                                         |                                                                                                 |                                                 |                                      
|                                                         |                                                                                                 | November 30,                                    |                                       |                                                         | November 30, |         
|                                                         |                                                                                                 | 2004                                            |                                       |                                                         | 2003         |         
|                                                         |                                                                                                 |                                                 |                                       |                                                         |              |         
|                                                         |                                                                                                 |                                                
|                                                         |                                                                                                 | (dollars in thousands)                          |                                      
|Cash flows from operating activities:                    |                                                                                                 |                                                 |                                       |                                                         |              |          |         |        
|                                                         | Net income                                                                                      |                                                 | $                                     | 17,996                                                  |              |          | $       | 50,739  |        
|                                                         | Adjustments to reconcile net income to net cash
    provided by (used in) operating activities: |                                                 |                                       |                                                         |              |          |         |         |        
|                                                         |                                                                                                 | Depreciation and amortization                   |                                       |                                                         | 27,118       |          |         |         | 26,815  |         
|                                                         |                                                                                                 | Noncash income from equity investments          |                                       |                                                         | (16,683      | )        |         |         | (13,707 | )       
|                                                         |                                                                                                 | Noncash loss on impairment of investment        |                                       |                                                         | 35,000       |          |         |         |         |         
|                                                         |                                                                                                 | Minority interests                              |                                       |                                                         | 8,189        |          |         |         | 3,922   |         
|                                                         |                                                                                                 | Noncash portion of patronage dividends received |                                       |                                                         | (221         | )        |         |         | (311    | )       
|                                                         |                                                                                                 | Gain on sale of property, plant and equipment   |                                       |                                                         | (1,209       | )        |         |         | (57     | )       
|                                                         |                                                                                                 | Other, net                                      |                                       |                                                         | 290          |          |         |         | 227     |         
|                                                         |                                                                                                 | Changes in operating assets and liabilities:    |                                       |                                                         |              |          |         |         |         |         
|                                                         |                                                                                                 |                                                 | Receivables                           |                                                         |              | (15,238  | )       |         |         | (45,022  | )       
|                                                         |                                                                                                 |                                                 | Inventories                           |                                                         |              | (117,380 | )       |         |         | (214,886 | )       
|                                                         |                                                                                                 |                                                 | Other current assets and other assets |                                                         |              | 9,666    |         |         |         | (122,914 | )       
|                                                         |                                                                                                 |                                                 | Customer credit balances              |                                                         |              | 4,409    |         |         |         | 12,838   |         
|                                                         |                                                                                                 |                                                 | Customer advance payments             |                                                         |              | 48,515   |         |         |         | 44,975   |         
|                                                         |                                                                                                 |                                                 | Accounts payable and accrued expenses |                                                         |              | 77,099   |         |         |         | 90,274   |         
|                                                         |                                                                                                 |                                                 | Other liabilities                     |                                                         |              | 857      |         |         |         | 6,649    |         
|                                                         |                                                                                                 |                                                 |                                       |                                                         |              |         
|                                                         |                                                                                                 |                                                 |                                       | Net cash provided by (used in) operating
    activities |              |          | 78,408  |         |         |          | (160,458 | )
|                                                         |                                                                                                 |                                                 |                                       |                                                         |              |         
|Cash flows from investing activities:                    |                                                                                                 |                                                 |                                       |                                                         |              |          |         |        
|                                                         | Acquisition of property, plant and equipment                                                    |                                                 |                                       | (63,856                                                 | )            |          |         | (52,233 | )      
|                                                         | Proceeds from disposition of property, plant and
    equipment                                  |                                                 |                                       | 5,871                                                   |              |          |         | 21,664  |        
|                                                         | Investments                                                                                     |                                                 |                                       | (46                                                     | )            |          |         | (10     | )      
|                                                         | Equity investments redeemed                                                                     |                                                 |                                       | 22,520                                                  |              |          |         | 27,493  |        
|                                                         | Investments redeemed                                                                            |                                                 |                                       | 983                                                     |              |          |         | 3,458   |        
|                                                         | Changes in notes receivable                                                                     |                                                 |                                       | 618                                                     |              |          |         | (6,144  | )      
|                                                         | Acquisitions of intangibles                                                                     |                                                 |                                       | (10                                                     | )            |          |         |         |        
|                                                         | Distribution to minority owners                                                                 |                                                 |                                       | (3,060                                                  | )            |          |         | (1,338  | )      
|                                                         | Other investing activities, net                                                                 |                                                 |                                       | 1,204                                                   |              |          |         | 2,507   |        
|                                                         |                                                                                                 |                                                 |                                       |                                                         |              |         
|                                                         |                                                                                                 |                                                 |                                       | Net cash used in investing activities                   |              |          | (35,776 | )       |         |          | (4,603   | )
|                                                         |                                                                                                 |                                                 |                                       |                                                         |              |         
|Cash flows from financing activities:                    |                                                                                                 |                                                 |                                       |                                                         |              |          |         |        
|                                                         | Changes in notes payable                                                                        |                                                 |                                       | (115,032                                                | )            |          |         | 125,715 |        
|                                                         | Borrowings on long-term debt                                                                    |                                                 |                                       | 125,000                                                 |              |          |         |         |        
|                                                         | Principal payments on long-term debt                                                            |                                                 |                                       | (6,548                                                  | )            |          |         | (3,771  | )      
|                                                         | Changes in checks and drafts outstanding                                                        |                                                 |                                       | (13,356                                                 | )            |          |         | (2,904  | )      
|                                                         | Preferred stock dividends paid                                                                  |                                                 |                                       | (2,113                                                  | )            |          |         | (1,874  | )      
|                                                         | Retirements of equities                                                                         |                                                 |                                       | (227                                                    | )            |          |         | (1,268  | )      
|                                                         |                                                                                                 |                                                 |                                       |                                                         |              |         
|                                                         |                                                                                                 |                                                 |                                       | Net cash (used in) provided by financing
    activities |              |          | (12,276 | )       |         |          | 115,898  |  
|                                                         |                                                                                                 |                                                 |                                       |                                                         |              |         
|Net increase (decrease) in cash and cash
    equivalents |                                                                                                 |                                                 | 30,356                                |                                                         |              |          | (49,163 | )      
|Cash and cash equivalents at beginning of period         |                                                                                                 |                                                 | 136,491                               |                                                         |              |          | 168,249 |        
|                                                         |                                                                                                 |                                                 |                                       |                                                         |              |         
|Cash and cash equivalents at end of period               |                                                                                                 | $                                               | 166,847                               |                                                         |              | $        | 119,086 |        
|                                                         |                                                                                                 |                                                 |                                       |                                                         |              |         

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

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CHS INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


(dollars in thousands)




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

The unaudited consolidated balance sheets as of
November 30, 2004 and 2003, and the statements of
operations and cash flows for the three months ended
November 30, 2004 and 2003 reflect, in the opinion of our
management, 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 our businesses.
The consolidated balance sheet data as of August 31, 2004
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 our
accounts and the accounts of all of our 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, 2004, included in our Annual
Report on Form 10-K, filed with the Securities and Exchange
Commission.



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

Goodwill was $26.9 million,
$26.9 million and $27.1 million on November 30,
2004, August 31, 2004 and November 30, 2003,
respectively, and is included in other assets in the
consolidated balance sheets.

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 1 to 15 years). The gross
carrying amount of these intangible assets is $34.8 million
with total accumulated amortization of $13.4 million as of
November 30, 2004. Intangible assets of $10 thousand and
$173 thousand (non-cash) were acquired during the three months
ended November 30, 2004 and 2003, respectively. Total
amortization expense for intangible assets during the
three-month periods ended November 30, 2004 and 2003, was
$0.8 million and $1.3 million, respectively. The
estimated amortization expense related to intangible assets
subject to amortization for the next five years will approximate
$2.4 million annually.



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

On May 19, 2004, the Financial Accounting
Standards Board (FASB) issued a FASB Staff Position
(FSP) regarding Statement of Financial Accounting
Standards (SFAS) No. 106, Employers
Accounting for Postretirement Benefits Other Than
Pensions. FSP 106-2, Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 discusses the
effect of the Medicare Prescription Drug, Improvement and
Modernization Act (the Act) enacted on
December 8, 2003. FSP 106-2 considers the effect of the two
new features introduced in the Act in determining accumulated
postretirement benefit obligation (APBO) and net
periodic postretirement benefit cost, which may serve to reduce
a companys postretirement benefit costs. The adoption of
this statement had no material effect on us.

In March 2004, the FASB Emerging Issues Task
Force (EITF) reached a consensus on and the FASB ratified
EITF Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments (EITF 03-1). EITF 03-1 provides
guidance for evaluating whether an investment is
other-than-temporarily impaired. On September 30, 2004, the
FASB issued FSP EITF 03-1-1, Effective Date of
Paragraphs 10-20 of EITF Issue No. 03-1, The
Meaning of Other-Than-

6



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##### Table of Contents



CHS INC. AND SUBSIDIARIES


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

Temporary Impairment and its Application to
Certain Investments, which delayed the effective
date of the application guidance on impairment of securities
included within EITF 03-1. We do not believe the adoption
of this standard will have a significant impact on our financial
statements.

On November 24, 2004, the FASB issued
SFAS No. 151, Inventory Costs, an amendment of
ARB No. 43, Chapter 4 to clarify the accounting
for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). SFAS No. 151
requires those items to be recognized as current-period charges
regardless of whether they meet the so abnormal
criterion outlined in ARB 43. It also introduces the concept of
normal capacity and requires the allocation of fixed
production overheads to inventory based on the normal capacity
of the production facilities. Unallocated overheads must be
recognized as an expense in the period in which they are
incurred. SFAS No. 151 is effective for inventory
costs incurred during fiscal years beginning after June 15,
2005. We have not yet determined what the effects of adopting
this standard will have on us.

On December 16, 2004, the FASB issued
SFAS No. 152, Accounting for Real Estate
Time-Sharing Transactions, an amendment of FASB Statements
No. 66 and 67, which is effective for fiscal years
beginning after June 15, 2005. Since this statement does
not apply to our business, we believe it will not have any
impact on our financial statements.

On December 16, 2004, the FASB issued
SFAS No. 153, Exchanges of Nonmonetary Assets,
an amendment of APB Opinion No. 29.
SFAS No. 153 replaces the exception from fair value
measurement in APB Opinion No. 29 for nonmonetary exchanges
of similar productive assets with a general exception from fair
value measurement for exchanges of nonmonetary assets that do
not have commercial substance. A nonmonetary exchange has
commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange.
SFAS No. 153 is to be applied prospectively, and is
effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after the date of issuance of
SFAS No. 153. We have not yet determined what the
effects of adopting this standard will have on us.

On December 16, 2004, the FASB issued
SFAS No. 123, Share-Based Payment, that
replaces SFAS No. 123 and will require compensation
costs related to share-based payment transactions to be
recognized in the financial statements. SFAS No. 154
is effective for public entities, other than small business
issuers, as of the first interim or annual reporting period that
begins after June 15, 2005. Since this statement does not
apply to our business, we believe it will not have any impact on
our financial statements.

A pending pronouncement, Emerging Issues Task
Force (EITF) 04-10, Determining Whether to Aggregate
Operating Segments That Do Not Meet the Quantitative
Thresholds was discussed on September 29-30, 2004,
and was ratified by the FASB on October 13, 2004. EITF
04-10 would provide guidance on the aggregation criteria found
in SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. Although the FASB
ratified the consensus in EITF 04-10, the FASB staff is in the
process of drafting a proposed FASB Staff Position (FSP) to
provide guidance in determining whether two or more operating
segments have similar economic characteristics and has delayed
the effective date indefinitely pending the issuance of this
FSP. We have not yet determined what effect this pronouncement
will have on us.



| |                  
| | -----------------
| | Reclassifications

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

7



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##### Table of Contents



CHS INC. AND SUBSIDIARIES


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



|        |            
|------- | -----------
|Note 2. | Receivables

|                                      |  |              |         |  |            |   |         |              |  |   |         | 
|------------------------------------- |  | ------------ | ------- |  | ---------- | - | ------- | ------------ |  | - | ------- | 
|                                      |  | November 30, |         |  | August 31, |   |         | November 30, | 
|                                      |  | 2004         |         |  | 2004       |   |         | 2003         | 
|                                      |  |              |         |  |            |   |         |              | 
|Trade                                 |  | $            | 846,528 |  |            | $ | 835,066 |              |  | $ | 798,238 | 
|Other                                 |  |              | 59,324  |  |            |   | 55,708  |              |  |   | 53,029  | 
|                                      |  |              |         |  |            |   |         |              | 
|                                      |  |              | 905,852 |  |            |   | 890,774 |              |  |   | 851,267 | 
|Less allowances for doubtful accounts |  |              | 56,040  |  |            |   | 55,809  |              |  |   | 32,635  | 
|                                      |  |              |         |  |            |   |         |              | 
|                                      |  | $            | 849,812 |  |            | $ | 834,965 |              |  | $ | 818,632 | 
|                                      |  |              |         |  |            |   |         |              | 



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

|                            |  |              |         |  |            |   |         |              |  |   |           | 
|--------------------------- |  | ------------ | ------- |  | ---------- | - | ------- | ------------ |  | - | --------- | 
|                            |  | November 30, |         |  | August 31, |   |         | November 30, | 
|                            |  | 2004         |         |  | 2004       |   |         | 2003         | 
|                            |  |              |         |  |            |   |         |              | 
|Grain and oilseed           |  | $            | 385,920 |  |            | $ | 308,207 |              |  | $ | 553,784   | 
|Energy                      |  |              | 301,162 |  |            |   | 277,801 |              |  |   | 322,417   | 
|Feed and farm supplies      |  |              | 127,409 |  |            |   | 110,885 |              |  |   | 113,784   | 
|Processed grain and oilseed |  |              | 25,537  |  |            |   | 25,740  |              |  |   | 31,396    | 
|Other                       |  |              | 1,245   |  |            |   | 1,260   |              |  |   | 1,142     | 
|                            |  |              |         |  |            |   |         |              | 
|                            |  | $            | 841,273 |  |            | $ | 723,893 |              |  | $ | 1,022,523 | 
|                            |  |              |         |  |            |   |         |              | 



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

Included in other current assets on
November 30, 2004, August 31, 2004 and
November 30, 2003 are derivative assets of
$48.9 million, $91.3 million and $107.7 million,
respectively. Included in accrued expenses on November 30,
2004, August 31, 2004 and November 30, 2003 are
derivative liabilities of $54.9 million,
$110.8 million and $85.6 million, respectively.



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

As of November 30, 2004 we evaluated the
carrying value of our investment in CF Industries, Inc., a
domestic fertilizer manufacturing company in which we hold a
minority interest. Our carrying value of $153.0 million
consists primarily of non-cash patronage refunds received from
CF Industries, Inc. over the years. Based upon this evaluation,
we determined that the carrying value of our CF Industries, Inc.
investment should be reduced by $35.0 million, resulting in
an impairment charge to our first quarter income. The net effect
to income after taxes was $32.1 million.

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

8



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##### Table of Contents



CHS INC. AND SUBSIDIARIES


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

in Agriliance for $27.5 million in cash. We
account for this investment using the equity method of
accounting.

The following provides summarized unaudited
financial information for our unconsolidated significant equity
investments in Ventura Foods, LLC (50% equity ownership) and
Agriliance, LLC, for the balance sheets as of November 30,
2004, August 31, 2004 and November 30, 2003 and
statements of operations for the three-month period as indicated
below.



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

|             |  |                            |         |  |              |   |         | 
|------------ |  | -------------------------- | ------- |  | ------------ | - | ------- | 
|             |  |                           
|             |  | For the Three Months Ended |        
|             |  |                            |        
|             |  | November 30,               |         |  | November 30, |  
|             |  | 2004                       |         |  | 2003         |  
|             |  |                            |         |  |              |  
|Net sales    |  | $                          | 385,179 |  |              | $ | 344,119 | 
|Gross profit |  |                            | 47,966  |  |              |   | 52,908  | 
|Net income   |  |                            | 19,846  |  |              |   | 23,616  | 

|                        |  |              |         |  |            |   |         |              |  |   |         | 
|----------------------- |  | ------------ | ------- |  | ---------- | - | ------- | ------------ |  | - | ------- | 
|                        |  | November 30, |         |  | August 31, |   |         | November 30, | 
|                        |  | 2004         |         |  | 2004       |   |         | 2003         | 
|                        |  |              |         |  |            |   |         |              | 
|Current assets          |  | $            | 303,735 |  |            | $ | 286,613 |              |  | $ | 192,103 | 
|Non-current assets      |  |              | 257,549 |  |            |   | 258,270 |              |  |   | 235,236 | 
|Current liabilities     |  |              | 142,003 |  |            |   | 171,269 |              |  |   | 216,754 | 
|Non-current liabilities |  |              | 220,366 |  |            |   | 194,547 |              |  |   | 21,738  | 



| |                
| | ---------------
| | Agriliance, LLC

|             |  |                            |         |   |              |   |         |  
|------------ |  | -------------------------- | ------- | - | ------------ | - | ------- | -
|             |  |                           
|             |  | For the Three Months Ended |        
|             |  |                            |        
|             |  | November 30,               |         |   | November 30, |  
|             |  | 2004                       |         |   | 2003         |  
|             |  |                            |         |   |              |  
|Net sales    |  | $                          | 598,162 |   |              | $ | 603,590 |  
|Gross profit |  |                            | 57,618  |   |              |   | 51,209  |  
|Net loss     |  |                            | (5,218  | ) |              |   | (14,442 | )

|                        |  |              |           |  |            |   |           |              |  |   |           | 
|----------------------- |  | ------------ | --------- |  | ---------- | - | --------- | ------------ |  | - | --------- | 
|                        |  | November 30, |           |  | August 31, |   |           | November 30, | 
|                        |  | 2004         |           |  | 2004       |   |           | 2003         | 
|                        |  |              |           |  |            |   |           |              | 
|Current assets          |  | $            | 1,545,675 |  |            | $ | 1,123,671 |              |  | $ | 1,396,015 | 
|Non-current assets      |  |              | 123,877   |  |            |   | 123,106   |              |  |   | 120,065   | 
|Current liabilities     |  |              | 1,306,759 |  |            |   | 878,814   |              |  |   | 1,274,986 | 
|Non-current liabilities |  |              | 128,827   |  |            |   | 128,780   |              |  |   | 26,784    | 

During the three months ended November 30,
2004 we included a pretax impairment charge of
$35.0 million in the consolidated statement of operations
to reduce our value of our CF Industries, Inc. investment in our
agronomy business segment.



|        |                                     
|------- | ------------------------------------
|Note 6. | Notes Payable and Long-term
    Debt

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

9



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##### Table of Contents



CHS INC. AND SUBSIDIARIES


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



|        |         
|------- | --------
|Note 7. | Equities

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

|                                                         |  |              |           |   |      |   |           |  
|-------------------------------------------------------- |  | ------------ | --------- | - | ---- | - | --------- | -
|                                                         |  |             
|                                                         |  | November 30, |          
|                                                         |  |              |          
|                                                         |  | 2004         |           |   | 2003 |  
|                                                         |  |              |           |   |      |  
|Balances, September 1, 2004 and 2003                     |  | $            | 1,628,086 |   |      | $ | 1,481,711 |  
|Net income                                               |  |              | 17,996    |   |      |   | 50,739    |  
|Other comprehensive income                               |  |              | 2,693     |   |      |   | 553       |  
|Equities retired                                         |  |              | (227      | ) |      |   | (1,268    | )
|Equity retirements accrued 2004 and 2003                 |  |              | 227       |   |      |   | 1,268     |  
|Equities issued in exchange for elevator
    properties  |  |              |           |   |      |   | 9,992     |  
|Preferred stock dividends                                |  |              | (2,113    | ) |      |   | (1,874    | )
|Preferred stock dividends accrued 2004 and 2003          |  |              | 1,409     |   |      |   | 1,249     |  
|Accrued dividends and equities payable 2005 and
    2004 |  |              | (23,909   | ) |      |   | (26,549   | )
|Other, net                                               |  |              | 31        |   |      |   | 313       |  
|                                                         |  |              |           |   |      |  
|Balances, November 30, 2004 and 2003                     |  | $            | 1,624,193 |   |      | $ | 1,516,134 |  
|                                                         |  |              |           |   |      |  



|        |                     
|------- | --------------------
|Note 8. | Comprehensive Income

Total comprehensive income primarily consists of
net income, additional minimum pension liability and cash flow
hedges. For the three months ended November 30, 2004
and 2003, total comprehensive income amounted to
$20.7 million and $51.3 million, respectively.
Accumulated other comprehensive loss on November 30, 2004,
August 31, 2004 and November 30, 2003 was
$4.4 million, $7.1 million and $17.8 million,
respectively.



|        |                       
|------- | ----------------------
|Note 9. | Employee Benefit Plans

Employee benefit information for the
three months ended November 30, 2004 and 2003 is as
follows:

|                                                                                    |  |                  |        |   |                  |   |        |                |  |   |      |  |  |      |     |  |      |   |     |   |  |   |     |  
|----------------------------------------------------------------------------------- |  | ---------------- | ------ | - | ---------------- | - | ------ | -------------- |  | - | ---- |  |  | ---- | --- |  | ---- | - | --- | - |  | - | --- | -
|                                                                                    |  |                  |        |   |                  |   |        |               
|                                                                                    |  | Qualified        |        |   | Non-Qualified    |   |        |               
|                                                                                    |  | Pension Benefits |        |   | Pension Benefits |   |        | Other Benefits | 
|                                                                                    |  |                  |        |   |                  |   |        |                | 
|                                                                                    |  | 2004             |        |   | 2003             |   |        | 2004           |  |   | 2003 |  |  | 2004 |     |  | 2003 |  
|                                                                                    |  |                  |        |   |                  |   |        |                |  |   |      |  |  |      |     |  |      |  
|Components of net periodic benefit cost for
    the three months ended November 30: |  |                  |        |   |                  |   |        |                |  |   |      |  |  |      |     |  |      |   |     |   |  |   |     |  
|Service cost                                                                        |  | $                | 3,054  |   |                  | $ | 2,887  |                |  | $ | 165  |  |  | $    | 150 |  |      | $ | 190 |   |  | $ | 189 |  
|Interest cost                                                                       |  |                  | 4,536  |   |                  |   | 4,301  |                |  |   | 219  |  |  |      | 206 |  |      |   | 401 |   |  |   | 439 |  
|Return on plan assets                                                               |  |                  | (6,839 | ) |                  |   | (6,872 | )              |  |   |      |  |  |      |     |  |      |   |     |   |  |   |     |  
|Prior service cost amortization                                                     |  |                  | 198    |   |                  |   | 211    |                |  |   | 128  |  |  |      | 132 |  |      |   | (72 | ) |  |   | (43 | )
|Actuarial loss (gain) amortization                                                  |  |                  | 1,173  |   |                  |   | 1,037  |                |  |   | 30   |  |  |      | 26  |  |      |   | (21 | ) |  |   | 27  |  
|Transition amount amortization                                                      |  |                  |        |   |                  |   |        |                |  |   |      |  |  |      |     |  |      |   | 51  |   |  |   | 234 |  
|Recognized net actuarial loss                                                       |  |                  |        |   |                  |   |        |                |  |   |      |  |  |      |     |  |      |   | 184 |   |  |   |     |  
|Other adjustments                                                                   |  |                  |        |   |                  |   |        |                |  |   |      |  |  |      | 251 |  |      |   |     |   |  |   |     |  
|                                                                                    |  |                  |        |   |                  |   |        |                |  |   |      |  |  |      |     |  |      |  
|Net periodic benefit cost                                                           |  | $                | 2,122  |   |                  | $ | 1,564  |                |  | $ | 542  |  |  | $    | 765 |  |      | $ | 733 |   |  | $ | 846 |  
|                                                                                    |  |                  |        |   |                  |   |        |                |  |   |      |  |  |      |     |  |      |  

10



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##### Table of Contents



CHS INC. AND SUBSIDIARIES


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



| |                       
| | ----------------------
| | Employer contributions

As of November 30, 2004, we expect to make
no contribution to our pension plan during the year ended
August 31, 2005.



|         |                  
|-------- | -----------------
|Note 10. | Segment Reporting

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

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

We assign certain corporate general and
administrative expenses to our business segments, based on use
of such services and allocate 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 our business are
allocated to the segments based upon factors which management
considers to be non-asymmetrical. Nevertheless, due to
efficiencies in scale, cost allocations, and intersegment
activity, management does not represent that these segments, if
operated independently, would report the income before income
taxes and other financial information as presented.

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 ended
November 30, 2004 and 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 November 30,
    2004 |                                                    |          |   |         |        |            |           |              |       |  |           |            |   |       |           |           |             |  |         |         |   |  |       |         |   |  |          |          |   |  |           |          
|                                                 | Net sales                                          |          |   |         |        |            | $         | 1,417,165    |       |  | $         | 476,628    |   |       | $         | 1,128,396 |             |  | $       | 159,733 |   |  |       |         |   |  | $        | (244,674 | ) |  | $         | 2,937,248 |  
|                                                 | Other revenues                                     |          |   |         |        |            |           | 2,689        |       |  |           | 28,012     |   |       |           | 11,865    |             |  |         | 919     |   |  | $     | 1,039   |   |  |          |          |   |  |           | 44,524    |  
|                                                 |                                                    |          |   |         |        |            |           |              |       |  |           |            |   |       |           |           |             |  |         |         |   |  |       |        
|                                                 |                                                    |          |   |         |        |            | 1,419,854 |              |       |  | 504,640   |            |   |       | 1,140,261 |           |             |  | 160,652 |         |   |  | 1,039 |         |   |  | (244,674 | )        |   |  | 2,981,772 |          
|                                                 | Cost of goods sold                                 |          |   |         |        |            |           | 1,356,376    |       |  |           | 474,029    |   |       |           | 1,129,909 |             |  |         | 157,093 |   |  |       |         |   |  |          | (244,674 | ) |  |           | 2,872,733 |  
|                                                 | Marketing, general and administrative              |          | $ | 839     |        |            |           | 13,978       |       |  |           | 17,550     |   |       |           | 6,533     |             |  |         | 7,407   |   |  |       | 1,609   |   |  |          |          |   |  |           | 47,916    |  
|                                                 |                                                    |          |   |         |        |            |           |              |       |  |           |            |   |       |           |           |             |  |         |         |   |  |       |        
|                                                 | Operating (losses) earnings                        |          |   | (839    | )      |            |           | 49,500       |       |  |           | 13,061     |   |       |           | 3,819     |             |  |         | (3,848  | ) |  |       | (570    | ) |  |          |         |   |  |           | 61,123    |  
|                                                 | Interest                                           |          |   | (95     | )      |            |           | 3,172        |       |  |           | 3,540      |   |       |           | 1,397     |             |  |         | 3,884   |   |  |       | (304    | ) |  |          |          |   |  |           | 11,594    |  
|                                                 | Equity loss (income) from investments              |          |   | 631     |        |            |           | (729         | )     |  |           | (427       | ) |       |           | (4,644    | )           |  |         | (11,514 | ) |  |       |         |   |  |          |          |   |  |           | (16,683   | )
|                                                 | Loss on impairment of investment                   |          |   | 35,000  |        |            |           |              |       |  |           |            |   |       |           |           |             |  |         |         |   |  |       |         |   |  |          |          |   |  |           | 35,000    |  
|                                                 | Minority interests                                 |          |   |         |        |            |           | 7,945        |       |  |           | 244        |   |       |           |           |             |  |         |         |   |  |       |         |   |  |          |          |   |  |           | 8,189     |  
|                                                 |                                                    |          |   |         |        |            |           |              |       |  |           |            |   |       |           |           |             |  |         |         |   |  |       |        
|                                                 | (Loss) income before income taxes                  |          | $ | (36,375 | )      |            | $         | 39,112       |       |  | $         | 9,704      |   |       | $         | 7,066     |             |  | $       | 3,782   |   |  | $     | (266    | ) |  | $        |         |   |  | $         | 23,023    |  
|                                                 |                                                    |          |   |         |        |            |           |              |       |  |           |            |   |       |           |           |             |  |         |         |   |  |       |        
|                                                 | Intersegment sales                                 |          |   |         |        |            | $         | (45,067      | )     |  | $         | (199,050   | ) |       | $         | (491      | )           |  | $       | (66     | ) |  |       |         |   |  | $        | 244,674  |   |  | $         |          |  
|                                                 |                                                    |          |   |         |        |            |           |              |       |  |           |            |   |       |           |           |             |  |         |         |   |  |       |        
|                                                 | Goodwill                                           |          |   |         |        |            | $         | 3,041        |       |  | $         | 250        |   |       |           |           |             |  | $       | 23,605  |   |  |       |         |   |  |          |          |   |  | $         | 26,896    |  
|                                                 |                                                    |          |   |         |        |            |           |              |       |  |           |            |   |       |           |           |             |  |         |         |   |  |       |        
|                                                 | Capital expenditures                               |          |   |         |        |            | $         | 53,477       |       |  | $         | 7,466      |   |       | $         | 1,039     |             |  | $       | 1,133   |   |  | $     | 741     |   |  |          |          |   |  | $         | 63,856    |  
|                                                 |                                                    |          |   |         |        |            |           |              |       |  |           |            |   |       |           |           |             |  |         |         |   |  |       |        
|                                                 | Depreciation and amortization                      |          |   |         |        |            | $         | 14,737       |       |  | $         | 5,511      |   |       | $         | 1,911     |             |  | $       | 4,066   |   |  | $     | 893     |   |  |          |          |   |  | $         | 27,118    |  
|                                                 |                                                    |          |   |         |        |            |           |              |       |  |           |            |   |       |           |           |             |  |         |         |   |  |       |        
|                                                 | Total identifiable assets at November 30,
    2004 |          | $ | 271,829 |        |            | $         | 1,638,657    |       |  | $         | 1,039,706  |   |       | $         | 433,665   |             |  | $       | 450,310 |   |  | $     | 342,731 |   |  |          |          |   |  | $         | 4,176,898 |  
|                                                 |                                                    |          |   |         |        |            |           |              |       |  |           |            |   |       |           |           |             |  |         |         |   |  |       |        
|For the Three Months Ended November 30,
    2003 |                                                    |          |   |         |        |            |           |              |       |  |           |            |   |       |           |           |             |  |         |         |   |  |       |         |   |  |          |          |   |  |           |          
|                                                 | Net sales                                          |          |   |         |        |            | $         | 916,040      |       |  | $         | 502,944    |   |       | $         | 1,205,217 |             |  | $       | 150,625 |   |  |       |         |   |  | $        | (285,482 | ) |  | $         | 2,489,344 |  
|                                                 | Other revenues                                     |          |   |         |        |            |           | 2,869        |       |  |           | 21,098     |   |       |           | 7,181     |             |  |         | 812     |   |  | $     | 1,073   |   |  |          |          |   |  |           | 33,033    |  
|                                                 |                                                    |          |   |         |        |            |           |              |       |  |           |            |   |       |           |           |             |  |         |         |   |  |       |        
|                                                 |                                                    |          |   |         |        |            | 918,909   |              |       |  | 524,042   |            |   |       | 1,212,398 |           |             |  | 151,437 |         |   |  | 1,073 |         |   |  | (285,482 | )        |   |  | 2,522,377 |          
|                                                 | Cost of goods sold                                 |          |   |         |        |            |           | 859,948      |       |  |           | 496,489    |   |       |           | 1,203,596 |             |  |         | 142,162 |   |  |       |         |   |  |          | (285,482 | ) |  |           | 2,416,713 |  
|                                                 | Marketing, general and administrative              |          | $ | 1,314   |        |            |           | 14,566       |       |  |           | 15,151     |   |       |           | 6,189     |             |  |         | 7,209   |   |  |       | 1,407   |   |  |          |          |   |  |           | 45,836    |  
|                                                 |                                                    |          |   |         |        |            |           |              |       |  |           |            |   |       |           |           |             |  |         |         |   |  |       |        
|                                                 | Operating (losses) earnings                        |          |   | (1,314  | )      |            |           | 44,395       |       |  |           | 12,402     |   |       |           | 2,613     |             |  |         | 2,066   |   |  |       | (334    | ) |  |          |         |   |  |           | 59,828    |  
|                                                 | Gain on legal settlement                           |          |   |         |        |            |           |              |       |  |           | (287       | ) |       |           |           |             |  |         |         |   |  |       |         |   |  |          |          |   |  |           | (287      | )
|                                                 | Interest                                           |          |   | (83     | )      |            |           | 3,799        |       |  |           | 3,245      |   |       |           | 1,154     |             |  |         | 3,516   |   |  |       | (91     | ) |  |          |          |   |  |           | 11,540    |  
|                                                 | Equity loss (income) from investments              |          |   | 3,131   |        |            |           | (296         | )     |  |           | (25        | ) |       |           | (1,975    | )           |  |         | (14,542 | ) |  |       |         |   |  |          |          |   |  |           | (13,707   | )
|                                                 | Minority interests                                 |          |   |         |        |            |           | 3,689        |       |  |           | 233        |   |       |           |           |             |  |         |         |   |  |       |         |   |  |          |          |   |  |           | 3,922     |  
|                                                 |                                                    |          |   |         |        |            |           |              |       |  |           |            |   |       |           |           |             |  |         |         |   |  |       |        
|                                                 | (Loss) income before income taxes                  |          | $ | (4,362  | )      |            | $         | 37,203       |       |  | $         | 9,236      |   |       | $         | 3,434     |             |  | $       | 13,092  |   |  | $     | (243    | ) |  | $        |         |   |  | $         | 58,360    |  
|                                                 |                                                    |          |   |         |        |            |           |              |       |  |           |            |   |       |           |           |             |  |         |         |   |  |       |        
|                                                 | Intersegment sales                                 |          |   |         |        |            | $         | (27,136      | )     |  | $         | (247,981   | ) |       | $         | (10,365   | )           |  |         |         |   |  |       |         |   |  | $        | 285,482  |   |  | $         |          |  
|                                                 |                                                    |          |   |         |        |            |           |              |       |  |           |            |   |       |           |           |             |  |         |         |   |  |       |        
|                                                 | Goodwill                                           |          |   |         |        |            | $         | 3,185        |       |  | $         | 262        |   |       |           |           |             |  | $       | 23,605  |   |  |       |         |   |  |          |          |   |  | $         | 27,052    |  
|                                                 |                                                    |          |   |         |        |            |           |              |       |  |           |            |   |       |           |           |             |  |         |         |   |  |       |        
|                                                 | Capital expenditures                               |          |   |         |        |            | $         | 32,389       |       |  | $         | 8,633      |   |       | $         | 2,998     |             |  | $       | 7,861   |   |  | $     | 352     |   |  |          |          |   |  | $         | 52,233    |  
|                                                 |                                                    |          |   |         |        |            |           |              |       |  |           |            |   |       |           |           |             |  |         |         |   |  |       |        
|                                                 | Depreciation and amortization                      |          | $ | 312     |        |            | $         | 14,413       |       |  | $         | 5,220      |   |       | $         | 2,277     |             |  | $       | 3,816   |   |  | $     | 777     |   |  |          |          |   |  | $         | 26,815    |  
|                                                 |                                                    |          |   |         |        |            |           |              |       |  |           |            |   |       |           |           |             |  |         |         |   |  |       |        
|                                                 | Total identifiable assets at November 30,
    2003 |          | $ | 269,320 |        |            | $         | 1,386,239    |       |  | $         | 1,113,530  |   |       | $         | 597,638   |             |  | $       | 508,118 |   |  | $     | 281,438 |   |  |          |          |   |  | $         | 4,156,283 |  
|                                                 |                                                    |          |   |         |        |            |           |              |       |  |           |            |   |       |           |           |             |  |         |         |   |  |       |        



|         |                              
|-------- | -----------------------------
|Note 11. | Commitments and Contingencies



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

We 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 our Laurel, Montana refinery and $311.0 million for
NCRAs McPherson, Kansas, refinery, of which
$66.5 million has been spent at the Laurel refinery and
$156.3 million has been spent by NCRA at the McPherson
refinery as of November 30, 2004. We expect all of these
compliance capital expenditures at the refineries to be complete
by December 31, 2005, and anticipate funding these projects
with a combination of cash flows from operations and debt
proceeds.



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

We are a guarantor for lines of credit for
related companies of which $32.1 million was outstanding as
of November 30, 2004. Our bank covenants allow maximum
guarantees of $150.0 million. In addition, our 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 November 30, 2004.

We adopted FASB Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, which requires disclosures to be

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CHS INC. AND SUBSIDIARIES


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

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.

We make seasonal and term loans to member
cooperatives, and our wholly-owned subsidiary, Fin-Ag, Inc.,
makes loans for agricultural purposes to individual producers.
Some of these loans are sold to CoBank, and we guarantee a
portion of the loans sold. In addition, we guarantee certain
debt and obligations under contracts for our subsidiaries and
members.

Our obligations pursuant to our guarantees as of
November 30, 2004 are as follows:

|                                                            |  |                        |        |  |              |   |        |                     |  |                                                                                                                                                                                                                                     |  |                                                                                                                      |  |                                           |  |                                         
|----------------------------------------------------------- |  | ---------------------- | ------ |  | ------------ | - | ------ | ------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------- |  | ----------------------------------------
|                                                            |  | Guarantee/             |        |  | Exposure on  |   |        |                     |  |                                                                                                                                                                                                                                     |  |                                                                                                                      |  |                                          
|                                                            |  | Maximum                |        |  | November 30, |   |        |                     |  |                                                                                                                                                                                                                                     |  |                                                                                                                      |  |                                          
|Entities                                                    |  | Exposure               |        |  | 2004         |   |        | Nature of Guarantee |  | Expiration Date                                                                                                                                                                                                                     |  | Triggering Event                                                                                                     |  | Recourse Provisions                      
|                                                            |  |                        |        |  |              |   |        |                     |  |                                                                                                                                                                                                                                     |  |                                                                                                                      |  |                                          
|                                                            |  |                        |        |  |              |   |        |                     |  |                                                                                                                                                                                                                                    
|                                                            |  | (dollars in thousands) |        |  |              |   |        |                     |  |                                                                                                                                                                                                                                     | 
|Our financial services cooperative loans sold to
    CoBank |  |                        | *      |  |              | $ | 6,002  |                     |  | 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            
|Fin-Ag, Inc. agricultural loans sold to CoBank              |  |                        | *      |  |              |   | 20,486 |                     |  | 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            
|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        |  | Nonperformance under flour sale agreement |  | Subrogation against Horizon Milling, LLC
|TEMCO, LLC                                                  |  | $                      | 25,000 |  |              |   | 4,650  |                     |  | Obligations by TEMCO, LLC under credit agreement                                                                                                                                                                                    |  | None stated                                                                                                          |  | Credit agreement default                  |  | Subrogation against TEMCO, LLC          
|Third parties                                               |  |                        | *      |  |              |   | 1,000  |                     |  | Surety for, or indemnificaton of surety for sales
    contracts between affiliates and sellers of grain under deferred
    payment                                                                                                  |  | None stated, but may be terminated by us at any
    time in regard to future obligations                             |  | Nonpayment                                |  | Subrogation against affiliates          
|                                                            |  |                        |        |  |              |   |        |                     |  |                                                                                                                                                                                                                                     |  |                                                                                                                      |  |                                          
|                                                            |  |                        |        |  |              | $ | 32,138 |                     |  |                                                                                                                                                                                                                                     |  |                                                                                                                      |  |                                           |  |                                         
|                                                            |  |                        |        |  |              |   |        |                     |  |                                                                                                                                                                                                                                     |  |                                                                                                                      |  |                                          



---



|  |                                                                                                                                                                                                                                           
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Our bank covenants allow for guarantees of up to
    $150.0 million, but we are 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.

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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|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 November 30,
2004, includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
In addition, we and our representatives and agents may from time
to time make other written or oral forward-looking statements,
including statements contained in our filings with the
Securities and Exchange Commission and our reports to our
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. We wish to caution readers not to
place undue reliance on any forward-looking statements, which
speak only as of the date made.

Our 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 our business, financial condition, liquidity, results
of operations or prospects, financial or otherwise . 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 us in the forward-looking statement or
statements.

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

We undertake no obligation to revise any
forward-looking statements to reflect future events or
circumstances.

Our revenues and operating results could be
adversely affected by changes in commodity
prices.Our revenues and earnings are
affected by market prices for commodities such as crude oil,
natural gas, grain, oilseeds, and flour. Commodity prices
generally are affected by a wide range of factors beyond our
control, including weather, disease, insect damage, drought, the
availability and adequacy of supply, government regulation and
policies, and general political and economic conditions. We are
also exposed to fluctuating commodity prices as the result of
our inventories of commodities, typically grain and petroleum
products, and purchase and sale contracts at fixed or partially
fixed prices. At any time, our inventory levels and unfulfilled
fixed or partially fixed price contract obligations may be
substantial. Increases in market prices for commodities that we
purchase without a corresponding increase in the prices of our
products or our sales volume or a decrease in our other
operating expenses could reduce our revenues and net income.

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



| |   |                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | levels of worldwide and domestic supplies;                                                                                                        
|
| |  | capacities of domestic and foreign refineries;                                                                                                    
|
| |  | the ability of the members of OPEC to agree to
    and maintain oil price and production controls, and the price
    and level of foreign imports;
|
| |  | political instability or armed conflict in
    oil-producing regions;                                                                             
|
| |  | the level of consumer demand;                                                                                                                     
|
| |  | the price and availability of alternative fuels;                                                                                                  

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| |   |                                                             
| | - | ------------------------------------------------------------
| |  | the availability of pipeline capacity; and                  
|
| |  | domestic and foreign governmental regulations and
    taxes.

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

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

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

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

We incur significant costs in complying with
applicable laws and regulations. any failure to make the capital
investments necessary to comply with these laws and regulations
could expose us to financial
liability.We are subject to numerous
federal, state and local provisions regulating our business and
operations and we incur and expect to incur significant capital
and operating expenses to comply with these laws and
regulations. We may be unable to pass on those expenses to
customers without experiencing volume and margin losses. For
example, capital expenditures for upgrading our refineries,
largely to comply with regulations requiring the reduction of
sulfur levels in refined petroleum products, are expected to be
approximately $87.0 million for our Laurel, Montana
refinery and $311.0 million for the National Cooperative
Refinery Associations (NCRA) McPherson, Kansas
refinery, of which $66.5 million had been spent at the
Laurel refinery and $156.3 million had been spent by NCRA
at the McPherson refinery as of November 30, 2004. We
expect all of these compliance capital expenditures at the
refineries to be completed by December 31, 2005, and
anticipate funding these projects with a combination of cash
flows from operations and debt proceeds.

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

Environmental liabilities could adversely
affect our results and financial
condition.Many of our current and
former facilities have been in operation for many years and,
over that time, we and other operators of those facilities have
generated, used, stored and disposed of substances or wastes
that are or might be considered hazardous under applicable
environmental laws, including chemicals and fuels stored

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in underground and above-ground tanks. Any past
or future actions in violation of applicable environmental laws
could subject us to administrative penalties, fines and
injunctions. Moreover, future or unknown past releases of
hazardous substances could subject us to private lawsuits
claiming damages and to adverse publicity.


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

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



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

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

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

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

Consolidation among purchasers of our products
and in wholesale and retail distribution channels has resulted
in a smaller customer base for our products and intensified the
competition for these customers.

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For example, ongoing consolidation among
distributors and brokers of food products and food retailers has
altered the buying patterns of these businesses, as they have
increasingly elected to work with product suppliers who can meet
their needs nationwide rather than just regionally or locally.
If these distributors, brokers, and retailers elect not to
purchase our products, our sales volumes, revenues, and
profitability could be significantly reduced.


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

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

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

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

General

We are a diversified company, which provides
grain, foods and energy resources to businesses and consumers.
As a cooperative, we are owned by farmers, ranchers and their
local cooperatives from the Great Lakes to the Pacific Northwest
and from the Canadian border to Texas. We also have preferred
stockholders that own shares of our 8% Cumulative Redeemable
Preferred Stock.

We provide a full range of production
agricultural inputs such as refined fuels, propane, farm
supplies, animal nutrients and agronomy products, as well as
services, which include hedging, financing and insurance
services. We own and operate petroleum refineries and pipelines
and market and distribute refined fuels and other energy
products under the Cenex® brand through a network of member
cooperatives and independents. We purchase grains and oilseeds
directly and indirectly from agricultural producers primarily in
the midwestern and western United States. These grains and
oilseeds are either sold to domestic and international
customers, or further processed into a variety of grain-based
products.

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

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

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

Our revenues 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 we purchase 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 our control, including the
weather, crop damage due to disease or insects, drought, the
availability and adequacy of supply, government regulations and
policies, world events, and general political and economic
conditions.

While our 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 we hold ownership interests of 50% or
less and do not control the operations. We account for these
investments primarily using the equity method of accounting,
where we record our proportionate share of income or loss
reported by the entity as equity income from investments,
without consolidating the revenues and expenses of the entity in
our consolidated statements of operations. These investments
principally include our 50% ownership in each of the following
companies; Agriliance, LLC (Agriliance), TEMCO, LLC (TEMCO),
United Harvest, LLC (United Harvest), Ventura Foods, LLC
(Ventura Foods), and our 24% ownership in Horizon Milling, LLC
(Horizon).

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

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April 30, 2004, we purchased all of
Farmlands remaining interest in Agriliance for
$27.5 million in cash. We continue to account for this
investment using the equity method of accounting.


The consolidated financial statements include our
accounts and all of our wholly-owned and majority-owned
subsidiaries, including the National Cooperative Refinery
Association (NCRA), which is included in the Energy segment. All
significant intercompany accounts and transactions have been
eliminated.

Recent Developments

Energy prices, driven primarily by global market
conditions and strong demand for energy products, increased
considerably during the three months ended November 30,
2004 when compared to the same three month period of the
previous year. Commodity prices for grain decreased, compared to
the high prices that were prevalent during most of fiscal 2004,
primarily due to a strong fall harvest throughout most of the
United States, which produced good yields and the quality
of most crops rated in excellent and good condition.

Results of Operations



| |                                                                    
| | -------------------------------------------------------------------
| | Comparison of the three months ended
    November 30, 2004 and 2003

General.We recorded
pretax earnings of $23.0 million during the three months
ended November 30, 2004 compared to $58.4 million in
the three months ended November 30, 2003, a decrease of
$35.4 million (60%).

The Agronomy segment generated pretax losses of
$36.4 million for the three months ended November 30,
2004 compared to losses of $4.4 million for the three
months ended November 30, 2003. The activity in this
segment represents our proportionate share of losses from our
investments and our interest and general and administrative
expenses that are attributable to this segment. The increase in
losses of $32.0 million is primarily due to a
$35.0 million impairment of our investment in CF
Industries, Inc. which was partially offset by improved
performance from our other agronomy investments. As of
November 30, 2004, we determined that the carrying value of
our investment in CF Industries, Inc., a domestic fertilizer
manufacturing company in which we hold a minority interest,
should be reduced by $35.0 million, resulting in an
impairment charge to our first quarter results. The net effect
to income after taxes was $32.1 million. Natural gas, the
primary component in nitrogen fertilizer, tends to be more
expensive in the United States than in most other parts of the
world. As a result, CF Industries, Inc. has incurred significant
losses in recent years because of increased costs for raw
materials while at the same time imports of less expensive
nitrogen fertilizer have increased. Based upon this evaluation,
we determined that it was appropriate to decrease our carrying
value in the investment $35.0 million with an impairment
charge to income for the three months ended November 30,
2004. Our proportionate share of earnings from our other
agronomy investments improved by $2.5 million and general
and administrative expenses improved by $0.5 million for
the three months ended November 30, 2004 compared to the
same period in 2003. Crop protection earnings improved, compared
to the same period in 2003, primarily as a result of increased
vendor rebates and competitive allowance programs, which were
partially offset by increased losses within the southern retail
operations as a result of adverse weather conditions in the
southeastern region of the United States. General and
administrative expenses decreased by $0.5 million compared
to November 30, 2003 and is primarily the result of
environmental and other expenses that are now charged directly
to Agriliance.

The Energy segment generated pretax earnings of
$39.1 million for the three months ended November 30,
2004 compared with $37.2 million for the three months
ended November 30, 2003. This increase in earnings of
$1.9 million (5%) is primarily attributable to slightly
higher margins on refined fuels products, which resulted mainly
from increased global demand. Earnings on lubricants and
petroleum equipment also improved, but were partially offset by
decreased propane earnings, compared to the same three-month
period of the previous year.

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The Country Operations and Services segment
generated pretax earnings of $9.7 million for the
three months ended November 30, 2004 compared to
$9.2 million for the three months ended
November 30, 2003. This increase in earnings of
$0.5 million (5%) resulted primarily from increased
revenues on services primarily related to grain storage and
drying, and improved operating margins on crop protection
products and sunflower processing, which was partially offset by
a decrease in commissions from commodity hedging and insurance
services. During the three months ended November 30, 2004,
the Country Operations and Services segment recorded
$0.3 million from the cash settlements of a class action
lawsuit alleging illegal price fixing against various feed
vitamin product suppliers.

The Grain Marketing segment generated pretax
earnings of $7.1 million for the three months ended
November 30, 2004 compared to $3.4 million for the
three months ended November 30, 2003. This increase in
earnings of $3.7 million (106%) includes improved earnings
of $2.7 million in our two exporting joint ventures, TEMCO
and United Harvest. Strong demands for grains, which were
exported out of the Pacific Northwest to Asia, and favorable
ocean freight spreads contributed to the improved earnings for
these two joint ventures. Earnings for our owned export
facilities improved primarily due to increased service revenues
related to grain handling activities and efficiencies that we
achieved as new railcar shuttle unloading capabilities became
operational.

The Processed Grains and Foods segment generated
pretax earnings of $3.8 million for the three months ended
November 30, 2004 compared to $13.1 million for the
three months ended November 30, 2003, a decrease in
earnings of $9.3 million (71%). Oilseed processing earnings
decreased $3.7 million, which was primarily the result of
lower crushing margins partially offset by improved oilseed
refining margins. Losses from our Mexican foods operations
increased $2.6 million compared to the same three-month
period of the previous year. This operation is currently
undergoing repositioning efforts. Our share of earnings from
Ventura Foods, our packaged foods joint venture, decreased
$1.9 million compared to the prior year. Our share of
earnings from Horizon Milling, our wheat milling joint venture,
decreased $1.1 million for the three months ended
November 30, 2004 compared to the three months ended
November 30, 2003.

Net Income.Consolidated net income for the three months ended
November 30, 2004 was $18.0 million compared to
$50.7 million for the three months ended November 30,
2003, which represents a $32.7 million (65%) decrease.

Net Sales.Consolidated net sales of $2.9 billion for the three months
ended November 30, 2004 compared to $2.5 billion for
the three months ended November 30, 2003, which represents
a $447.9 million (18%) increase.

Energy net sales of $1.4 billion increased
$483.2 million (54%) during the three months ended
November 30, 2004 compared to the three months ended
November 30, 2003. During the three months ended
November 30, 2004 and 2003, the Energy segment recorded
sales to the Country Operations and Services segment of
$45.1 million and $27.1 million, respectively.
Intersegment sales are eliminated in deriving consolidated sales
but are included for segment reporting purposes. The net sales
increase of $483.2 million is comprised of an increase of
$449.3 million related to price appreciation on refined
fuels and propane products and $33.9 million due to higher
sales volume, primarily on propane products. On a more
product-specific basis, we own and operate two crude oil
refineries where we produce approximately 60% of the refined
fuels products that we sell and we purchase the balance from
other U.S. refiners and distributors. Refined fuels net
sales increased $331.2 million (51%), of which
$330.0 million was related to a net average price increase
and $1.2 million was related to increased volumes. The
sales price of refined fuels increased $0.47 per gallon
(50%) and volumes increased slightly when comparing the three
months ended November 30, 2004 with the same period a year
ago. Higher crude oil costs and global supply and demand
contributed to the increase in refined fuels selling prices.
Propane net sales increased by $82.4 million (65%), of
which $48.6 million was related to a net average selling
price increase and $33.8 million was due to increased
volumes compared to the same three-month period in the previous
year. Propane prices increased $0.25 per gallon (38%) and
sales volume increased 19% in comparison to the same period of
the prior year. Higher propane prices reflect lower industry
stocks during the three

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months ended November 30, 2004 compared to
the same period in 2003. The propane volume increase is
primarily reflective of a wetter and cooler autumn, which
increased demand for these products for crop drying and home
heating use.


Company-wide grain and oilseed net sales of
$1.2 billion decreased $74.1 million (6%) during the
three months ended November 30, 2004 compared to the three
months ended November 30, 2003. Sales to external customers
by the Grain Marketing segment totaled $1,127.9 million and
$1,194.9 million during the three months ended
November 30, 2004 and 2003, respectively. Grain sales of
the Country Operations and Services segment to external
customers during these same periods were $74.5 million and
$81.6 million, respectively. Sales of grain between the
Country Operations and Services and Grain Marketing segments
during these same periods were $199.5 million and
$258.3 million, respectively. These intersegment sales are
included for segment reporting purposes, but are eliminated on a
consolidated basis. The net sales decrease of $74.1 million
is attributable to decreased grain prices, which was partially
offset by increased volumes during the three months ended
November 30, 2004 compared to the same period last fiscal
year. The average sales price of all grain and oilseed
commodities sold reflected a decrease of $0.38 per bushel
(9%), which contributed $110.0 million to the decrease in
net sales. Commodity prices in general decreased due to a strong
fall 2004 harvest that produced good yields throughout most of
the U.S. and the quality of most grains were rated as excellent
or good. The average market price per bushel of soybeans, spring
wheat and corn were approximately $2.22, $0.73 and $0.54 less
than the prices on those same grains as compared to the three
months ended November 30, 2003. Volumes increased 3% during
the three months ended November 30, 2004 compared with the
same period of a year ago, which partially offset the decrease
in sales by $35.9 million. Wheat and soybeans reflected the
largest volume increases, while corn volumes decreased compared
to the three months ended November 30, 2003.

Country operations non-grain net sales of
$203.1 million increased by $29.8 million (17%) during
the three months ended November 30, 2004 compared to the
three months ended November 30, 2003 primarily the result
of increased sales of energy and crop nutrients products. The
average selling price of energy products increased due to
overall market conditions with volumes staying fairly consistent
to the three months ended November 20, 2003. Crop nutrients
average selling price increased primarily due to market
conditions and volumes increased primarily due to weather
conditions that allowed for the increased opportunity for sales
of these products.

Processed Grains and Foods segment net sales of
$159.7 million increased $9.1 million (6%) during the
three months ended November 30, 2004 compared to the three
months ended November 30, 2003. Oilseed processing sales
increased $9.8 million, of which $5.9 million was due
to higher sales volumes and $3.9 million was due to price
appreciation. The average selling price of refined oilseed
products increased $0.06 per pound, which was partially
offset by a $37 per ton decrease in processed oilseed
compared to the same three month period of the previous year.
The volume increase is primarily due to the additional volumes
of processed oilseed from our crushing plant in Fairmont,
Minnesota that began operations during the first quarter of
fiscal year 2004. The change in price is primarily related to
overall global market conditions for soybean meal and oil.

Other Revenues.Other revenues of $44.5 million increased
$11.5 million (35%) during the three months ended
November 30, 2004 compared to the three months ended
November 30, 2003. The majority of our other revenue is
generated within the Country Operations and Services and Grain
Marketing segments. Our Country Operations and Services
segments elevator and agri-service centers receive other
revenues from activities related to production agriculture which
include grain storage, grain cleaning, fertilizer spreading,
crop protection product spraying and other services of this
nature, along with hedging, financial and insurance services.
The Grain Marketing segment records other revenues at our export
terminals from activities related to loading vessels. Other
revenues within the Country Operations and Services segment
increased $6.9 million (33%) primarily due to increased
grain storage and drying revenues, which were partially offset
by decreased commissions on commodity hedging and insurance
services. Other revenues within the Grain Marketing segment
increased by $4.7 million (65%) compared to the same period
of the prior year, primarily due to a faster turnaround on
vessels that we load at our export terminals and operating
efficiencies achieved through our new railcar shuttle unloading
capabilities.

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Cost of Goods Sold.Cost of goods sold of $2.9 billion increased
$456.0 million (19%) during the three months ended
November 30, 2004 compared to the three months ended
November 30, 2003.

The Energy segment net cost of goods sold of
$1.4 billion increased by $478.5 million (57%) during
the three months ended November 30, 2004 compared to the
same period of the prior year, primarily due to increased
average costs. On a more product-specific basis, the average
cost of refined fuels increased by $0.48 (53%) per gallon and
volumes increased slightly compared to the three months ended
November 30, 2003. The average cost increase on refined
fuels is reflective of higher input costs at our two crude oil
refineries and higher average prices on the refined products
that we purchased for resale compared to the three months ended
November 30, 2003. The average per unit cost of crude oil
purchased for the two refineries increased 60% compared to the
three months ended November 30, 2003. We process
approximately 55,000 barrels of crude oil per day at our
Laurel, Montana refinery and 80,000 barrels of crude oil
per day at NCRAs McPherson, Kansas refinery. The average
cost of propane increased $0.26 (40%) per gallon along with a
19% increase in volumes compared to the three months ended
November 30, 2003. The average price of propane increased
due to higher input costs and volumes increased due to a wetter
and cooler autumn, which caused higher demand for crop drying
and home heating compared to the same period in the previous
year.

The cost of goods sold on all grains and oilseed
procured through our Grain Marketing and Country Operations and
Services segments of $1.2 billion decreased
$70.8 million (6%) compared to the three months ended
November 30, 2003, primarily the result of a $0.37 (8%)
average cost per bushel decrease, which was partially offset by
a 3% increase in volumes compared to the prior year. Overall
commodity prices decreased compared to the same three-month
period in the previous year, which was partially offset by an
increase in volumes, primarily in wheat and soybeans. Commodity
prices on soybeans, wheat and corn have decreased, compared to
the high prices that were prevalent during the majority of
fiscal 2004. Volumes of wheat and soybeans have increased,
primarily as a result of global demand, while corn volumes have
decreased.

Country operations cost of goods sold, excluding
the cost of grain procured by this segment, was
$218.0 million and increased $33.4 million (18%)
during the three months ended November 30, 2004 compared to
the three months ended November 30, 2003, primarily due to
energy and crop nutrients products. The average cost of energy
products increased due to overall market condition while volumes
stayed fairly consistent to the three months ended
November 20, 2003. Crop nutrients average cost increased
primarily due to market conditions and volumes increased
primarily due to weather conditions that increased the demand
for these products.

The Processed Grains and Foods segment cost of
goods sold of $157.1 million increased by
$14.9 million (11%) compared to the three months ended
November 30, 2003, which was primarily due to the increased
cost of soybean crude oil and additional volumes of soybeans
processed at our crushing plant in Fairmont, Minnesota.

Marketing, General and
Administrative.Marketing, general and
administrative expenses of $47.9 million for the three
months ended November 30, 2004 increased by
$2.1 million (5%) compared to the three months ended
November 30, 2003. The net increase is primarily due to
higher administrative costs in the Country Operations and
Services segment.

Gain on Legal
Settlements.The Country Operations
and Services segment received cash of $0.3 million during
the three months ended November 30, 2003 from the
settlement of a class action lawsuit alleging illegal price
fixing against various feed vitamin product suppliers.

Interest.Interest
expense of $11.6 million for the three months ended
November 30, 2004 increased slightly compared to the three
months ended November 30, 2003. The average short-term
interest rate increased 0.3% and was partially offset by a
decrease in the average level of short-term borrowings of
$246.9 million during the three months ended
November 30, 2004 compared to the same period in 2003.

Equity Income from
Investments.Equity income from
investments of $16.7 million for the three months ended
November 30, 2004 increased by $3.0 million (22%)
compared to the three months ended

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November 30, 2003. We record equity income
or loss from the investments that we own 50% or less of for our
proportionate share of income or loss reported by the entity,
without consolidating the revenues and expenses of the entity in
our consolidated statements of operations. The increase in
equity income from investments was primarily attributable to
improved earnings from investments within our Grain Marketing
segment of $2.7 million and decreased losses from our
Agronomy segment investments of $2.5 million, which are
partially offset by decreased earnings of $3.0 million from
investments within our Processed Grains and Foods segment.


The Grain Marketing segment generated increased
earnings of $2.7 million, primarily in two exporting joint
ventures due to increased export demand and favorable ocean
freight spreads from the Pacific Northwest, where the exporting
facilities are located, to the Pacific Rim. These factors
contributed to a $2.1 million increase in equity income
from our investment in TEMCO, a joint venture, which exports
primarily corn and soybeans. Similar conditions contributed to a
$0.6 million improvement in equity income from our wheat
exporting investment in United Harvest.

The Agronomy segment recorded decreased losses of
$2.5 million from equity investments. This improvement is
primarily attributable to the wholesale crop protections
operations of the Agriliance joint venture. Crop protection
products primarily consist of the wholesale distribution and, to
a lesser degree, the blending and packaging of herbicide and
pesticide products. Crop protection earnings improved compared
to the same period in 2003 as a result of increased vendor
rebates and competitive allowance; however, the prices of these
products continue to decline as many come off patent and are
replaced by cheaper generic brands. Crop nutrient volumes, which
primarily consist of fertilizers and micronutrients, are down 2%
over last year, primarily due to a competitive, global supply
environment, which has affected both price and volume. Southern
retail operations losses increased compared to the same period
in 2003 as a result of adverse weather conditions in the
southeastern region of the United States.

The Processed Grains and Foods segment reported
decreased earnings of $3.0 million from equity investments.
Ventura Foods, our oilseed-based products and packaged foods
joint venture, recorded decreased earnings of $1.9 million
and Horizon, our wheat milling joint venture, recorded decreased
earnings of $1.1 million compared to the same three months
in the previous year, primarily as a result of reduced margins
due to higher input costs.

Loss on Impairment of
Investments.We recorded a pretax
impairment loss on our CF Industries, Inc. investment of
$35.0 million for the three months ended November 30,
2004.

Minority Interests.Minority interests of $8.2 million for the three months
ended November 30, 2004 increased by $4.3 million
(109%) compared to the three months ended November 30,
2003. This increase was primarily a result of more profitable
operations within our majority-owned subsidiaries compared to
the three months ended November 30, 2003. Substantially all
minority interests relate to NCRA, an approximately 74.5% owned
subsidiary which we consolidate in our Energy segment.

Income Taxes.Income
tax expense of $5.0 million for the three months ended
November 30, 2004 compares with $7.6 million for the
three months ended November 30, 2003, resulting in
effective tax rates of 21.8% and 13.1%, respectively. The
federal and state statutory rate applied to nonpatronage
business activity was 38.9% for the periods ended
November 30, 2004 and 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 November 30, 2004, we had working
capital, defined as current assets less current liabilities, of
$616.9 million and a current ratio, defined as current
assets divided by current liabilities, of 1.4 to 1.0
compared to working capital of $493.4 million and a current
ratio of 1.3 to 1.0 on August 31, 2004. On
November 30, 2003, we had working capital of
$489.3 million and a current ratio 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. The increase
in working capital between August 31, 2004 and
November 30, 2004 is primarily due to the addition of

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$125.0 million in long-term debt during this
period. 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.


We have committed lines of revolving credit which
are used primarily to finance inventories and receivables
consisting of a $750 million 364-day revolver and a
$150 million three-year revolver. These credit facilities
are established with a syndicate of domestic and international
banks, and the inventories and receivables financed with these
loans are highly liquid. On November 30, 2004, there were
no dollars outstanding on these lines of credit as we used the
proceeds from the addition of $125.0 million in long-term
debt previously mentioned, to pay down the revolving lines of
credit. Our management believes we have adequate liquidity to
cover any increase in net operating assets and liabilities in
the foreseeable future.



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

Cash flows from operations are generally affected
by commodity prices. These commodity prices are affected by a
wide range of factors beyond our control, including weather,
crop conditions, drought, the availability and the adequacy of
supply and transportation, government regulations and policies,
world events, and general political and economic conditions.
These factors are described in the preceding cautionary
statement above, and may affect net operating assets and
liabilities, and liquidity.

Cash flows provided by operating activities were
$78.4 million for the three months ended November 30,
2004. Cash flows used in operating activities were
$160.5 million during the three months ended
November 30, 2003. Volatility in cash flows from operations
for these periods is primarily the result of changing grain
prices as well as grain inventory quantities. On
November 30, 2004, the market price per bushel of spring
wheat, soybeans and corn decreased by $0.21 (6%), $0.93 (15%)
and $0.35 (15%), respectively, when compared to their respective
values on August 31, 2004, but due to harvest, there was an
increase in grain inventories of 33.7 million bushels
(222%) in the Country Operations and Services segment. The
effect of declining grain prices contributed to the cash
provided by operating activities during the three months ended
November 30, 2004. On November 30, 2003, the market
price per bushel of spring wheat, soybeans and corn were $0.30
(8%), $1.85 (31%), and $.01 (0%) greater than their respective
values on August 31, 2003. These increases in grain prices,
in combination with larger inventories of 25.6 million
bushels and 14.0 million bushels for the Country Operations
and Services and the Grain Marketing segments, respectively, had
the effect of contributing significantly to an increase in net
operating assets and liabilities compared to those on
August, 31, 2003, thus using cash resources.

Our operating activities provided net cash of
$78.4 million during the three months ended
November 30, 2004. Net income of $18.0 million, net
non-cash expenses of $52.5 million, and a decrease in net
operating assets and liabilities of $7.9 million, provided
this net cash from operating activities. The primary components
of net non-cash expenses included depreciation and amortization
of $27.1 million, loss on impairment of investment of
$35.0 million and minority interests of $8.2 million,
partially offset by income from equity investments of
$16.7 million. The decrease in net operating assets and
liabilities was caused primarily by a decrease in the market
price of grain as discussed in the preceding paragraph, which
decreased grain inventory values and other related items such as
hedging deposits that are included in other current assets.

Our operating activities used net cash of
$160.5 million during the three months ended
November 30, 2003. Net income of $50.7 million and net
non-cash expenses of $16.9 million were offset by an
increase in net operating assets and liabilities of
$228.1 million. The primary components of net non-cash
expenses included depreciation and amortization of
$26.8 million and minority interests of $3.9 million,
which were partially offset by income from investments of
$13.7 million. The increase in net operating assets and
liabilities was caused primarily by an increase in the market
price of grain as previously discussed. Factors contributing to
the price appreciation included a shortage of transportation and
a perceived future shortage of soybeans due to poor late season
growing conditions for that crop. A major part of the increase
in net operating assets and liabilities was financed with
short-term notes payable. Because the change in short-

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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.


We expect our net operating assets and
liabilities to increase when compared to the levels on
November 30, 2004, through the second quarter of fiscal
2005. We expect to increase crop nutrient and crop protection
product inventories and prepayments to suppliers of these
products at our country operations locations during the second
fiscal quarter. At the same time, we expect this increase in net
operating assets and liabilities to be partially offset by the
collection of prepayments from our own customers for these
products. Prepayments are frequently used for agronomy products
to assure supply, and at times to guarantee price. Harvest for
several commodities was delayed due to wet weather conditions.
Production forecasts indicated normal to above normal volumes
for most commodities, and a strong harvest did produce good
yields. Anticipation of adequate supply has had the effect of
producing grain prices that are generally lower than the prices
of a year ago. Although crude oil prices are at or near
historical highs, related inventories and receivables are turned
in a relatively short period, thus mitigating the effect on
operating assets and liabilities. We believe that we have
adequate capacity through our committed credit facility to meet
any likely increase in net operating assets and liabilities.



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

For the three months ended November 30, 2004
and 2003, the net cash flows used in our investing activities
totaled $35.8 million and $4.6 million, respectively.

The acquisition of property, plant and equipment
comprised the primary use of cash totaling $63.9 million
and $52.2 million for the three months ended
November 30, 2004 and 2003, respectively. During the first
quarter of the prior fiscal year, we entered into a
sale-leaseback transaction for our Fairmont oilseed crushing
facility equipment and received cash proceeds of
$19.8 million from the sale. For the year ending
August 31, 2005, we expect to spend approximately
$313.9 million for the acquisition of property, plant and
equipment. Capital expenditures primarily related to the
U.S. Environmental Protection Agency (EPA) low sulfur
fuel regulations required by 2006, are expected to be
approximately $87.0 million for our Laurel, Montana
refinery and $311.0 million for NCRAs McPherson,
Kansas refinery, of which $66.5 million has been spent at
the Laurel refinery and $156.3 million has been spent by
NCRA at the McPherson refinery as of November 30, 2004. We
expect all of these compliance capital expenditures at the
refineries to be complete by December 31, 2005, and
anticipates funding these projects with a combination of cash
flows from operations and debt proceeds.

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

Investments made during the three months ended
November 30, 2004 and 2003 totaled $46 thousand and $10
thousand, respectively.

During the three months ended November 30,
2004, the changes in notes receivable resulted in an increase in
cash flows of $0.6 million, and during the three months
ended November 30, 2003, a decrease

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in cash flows of $6.1 million, primarily
from related party notes receivables at NCRA with its minority
owners, Growmark, Inc. and MFA Oil Company.


Distributions to minority owners for the three
months ended November 30, 2004 and 2003 were
$3.1 million and $1.3 million, respectively, and were
primarily related to NCRA. NCRAs cash distributions to
members have decreased as a percent of earnings in fiscal years
2002 through 2005, when compared to prior years, due to the
funding requirements for environmental capital expenditures
previously discussed.

Partially offsetting cash outlays in investing
activities were proceeds from the disposition of property, plant
and equipment of $5.9 million and $21.7 million for
the three months ended November 30, 2004 and 2003,
respectively. During the three months ended November 30,
2003, proceeds of $19.8 million were from a sale-leaseback
transaction, as previously discussed. Also partially offsetting
cash usages were distributions received from joint ventures and
investments totaling $23.5 million and $31.0 million
for the three months ended November 30, 2004 and 2003,
respectively.



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

We finance our working capital needs through
short-term lines of credit with a syndication of domestic and
international banks. In May 2004, we renewed and expanded our
committed lines of revolving credit. The previously established
credit lines consisted of a $600.0 million 364-day revolver
and a $100.0 million three-year revolver. The new committed
credit facilities consist of a $750.0 million 364-day
revolver and a $150.0 million three-year revolver. The
terms of the new credit facilities are essentially the same as
the terms of the credit facilities they replaced. In addition to
these lines of credit, we have a two-year revolving credit
facility dedicated to NCRA, with a syndication of banks in the
amount of $15.0 million committed. On November 30,
2004, August 31, 2004 and November 30, 2003, we had
total short-term indebtedness outstanding on these various
facilities and other short-term notes payable totaling
$1.1 million, $116.1 million and $376.8 million,
respectively. In September 2004, $125.0 million received
from private placement proceeds was used to pay down our 364-day
credit facility.

We finance our 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, we established a long-term credit agreement
through the cooperative banks. This facility committed
$200.0 million of long-term borrowing capacity to us, with
repayments through fiscal year 2009. The amount outstanding on
this credit facility was $127.1 million,
$131.2 million and $136.1 million on November 30,
2004, August 31, 2004 and November 30, 2003,
respectively. Interest rates on November 30, 2004 ranged
from 2.72% to 7.13%. Repayments of $4.1 million and
$1.6 million were made on this facility during each of the
three months ended November 30, 2004 and 2003, respectively.

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

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

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

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

In September 2004, we entered into a private
placement with several insurance companies for long-term debt in
the amount of $125.0 million with an interest rate of
5.25%. The debt is due in equal annual installments of
$25.0 million during the fiscal years 2011 through 2015.

Through NCRA, we had revolving term loans
outstanding of $11.3 million, $12.0 million and
$14.3 million for the periods ended November 30, 2004,
August 31, 2004 and November 30, 2003, respectively.
Interest rates on November 30, 2004 ranged from 6.48% to
6.99%. Repayments of $0.8 million were made during each of
the three months ended November 30, 2004 and 2003.

On November 30, 2004, we had total long-term
debt outstanding of $802.5 million, of which
$149.5 million was bank financing, $635.0 million was
private placement debt and $18.0 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 our Annual Report
on Form 10-K for the year ended August 31, 2004 has
not materially changed during the three months ended
November 30, 2004, other than for the $125.0 million
of private placement debt discussed previously, of which
repayments will start in 2011. On November 30, 2003, we had
total long-term debt outstanding of $659.6 million. Our
long-term debt is unsecured except for other notes and contracts
in the amount of $9.9 million; however, restrictive
covenants under various agreements have requirements for
maintenance of minimum working capital levels and other
financial ratios. We were in compliance with all debt covenants
and restrictions as of November 30, 2004.

During the three months ended November 30,
2004 and 2003, we borrowed on a long-term basis
$125.0 million and no dollars, respectively, and during the
same periods repaid long-term debt of $6.5 million and
$3.8 million, respectively.

In accordance with the bylaws and by action of
our 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
our Board of Directors, with the balance issued in the form of
capital equity certificates. The patronage earnings from the
fiscal year ended August 31, 2004 are expected to be
distributed during the second quarter of the fiscal year 2005.
The cash portion of this distribution, deemed by our Board of
Directors to be 30%, is expected to be approximately
$50.1 million and is classified as a current liability on
the November 30, 2004 and the August 31, 2004
consolidated balance sheets.

Effective September 1, 2004, redemptions of
capital equity certificates approved by our Board of Directors
will be divided into two pools, one for non-individuals
(primarily member cooperatives) who will participate in an
annual pro-rata program for equities older than 10 years,
and another for individual members who are eligible for equity
redemptions at age 72 or upon death. These equity
redemptions are not automatic, and will only be redeemed upon
approval by our Board of Directors. The amount that each
non-individual member receives under the pro-rata program in any
year will be determined by multiplying the dollars available for
pro-rata redemptions that year as determined by our Board of
Directors, by a fraction, the numerator of which is the amount
of patronage certificates older than 10 years held by that
member, and the denominator is the sum of the patronage
certificates older than 10 years held by all eligible
non-individuals. Total cash redemptions related to the year
ended August 31, 2004, to be distributed in fiscal year
2005, are expected to be approximately $32.1 million, of
which $0.2 million was redeemed during the three months
ended November 30, 2004 compared to $1.3 million
during the three months ended November 30, 2003.

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We expect to redeem an additional
$20.0 million of capital equity certificates during the
second quarter of fiscal year 2005 by issuing shares of our 8%
Cumulative Redeemable Preferred Stock (Preferred Stock) pursuant
to a registration statement on Form S-2 filed with the
Securities and Exchange Commission on December 6, 2004.

On November 30, 2004, we had
4,226,428 shares of Preferred Stock outstanding with a
total redemption value of approximately $105.7 million,
excluding accumulated dividends. The Preferred Stock accumulates
dividends at a rate of 8% per year, and dividends are
payable quarterly.

Off Balance Sheet Financing
Arrangements



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

Our lease commitments presented in
Managements Discussion and Analysis in our Annual Report
on Form 10-K for the year ended August 31, 2004 have
not materially changed during the three months ended
November 30, 2004.



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

We are a guarantor for lines of credit for
related companies of which $32.1 million was outstanding on
November 30, 2004. Our bank covenants allow maximum
guarantees of $150.0 million. In addition, our 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 November 30, 2004.



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

We have no material off balance sheet debt.

Contractual Obligations

Our contractual obligations are presented in
Managements Discussion and Analysis in our Annual Report
on Form 10-K for the year ended August 31, 2004. The
total obligations have not materially changed during the three
months ended November 30, 2004.

Critical Accounting Policies

Our Critical Accounting Policies are presented in
our Annual Report on Form 10-K for the year ended
August 31, 2004. There have been no changes to these
policies during the three months ended November 30, 2004.

Effect of Inflation and Foreign Currency
Transactions

Inflation and foreign currency fluctuations have
not had a significant effect on our operations. During fiscal
2003, we opened a grain marketing office in Brazil that impacts
our exposure to foreign currency fluctuations, but to date,
there has been no material effect.

Recent Accounting Pronouncements

On May 19, 2004, the Financial Accounting
Standards Board (FASB) issued a FASB Staff Position
(FSP) regarding Statement of Financial Accounting
Standards (SFAS) No. 106, Employers
Accounting for Postretirement Benefits Other Than
Pensions. FSP 106-2, Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 discusses the
effect of the Medicare Prescription Drug, Improvement and
Modernization Act (the Act) enacted on
December 8, 2003. FSP 106-2 considers the effect of the two
new features introduced in the Act in determining accumulated
postretirement benefit obligation (APBO) and net
periodic postretirement benefit cost, which may serve to reduce
a companys postretirement benefit costs. The adoption of
this statement had no material effect on us.

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In March 2004, the FASB Emerging Issues Task
Force (EITF) reached a consensus on and the FASB ratified
EITF Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments (EITF 03-1). EITF 03-1 provides
guidance for evaluating whether an investment is
other-than-temporarily impaired. On September 30, 2004, the
FASB issued FSP EITF 03-1-1, Effective Date of
Paragraphs 10-20 of EITF Issue No. 03-1, The
Meaning of Other-Than-Temporary Impairment and its Application
to Certain Investments, which delayed the effective
date of the application guidance on impairment of securities
included within EITF 03-1. We do not believe the adoption
of this standard will have a significant impact on our financial
statements.

On November 24, 2004, the FASB issued
SFAS No. 151, Inventory Costs, an amendment of
ARB No. 43, Chapter 4 to clarify the accounting
for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). SFAS No. 151
requires those items to be recognized as current-period charges
regardless of whether they meet the so abnormal
criterion outlined in ARB 43. It also introduces the concept of
normal capacity and requires the allocation of fixed
production overheads to inventory based on the normal capacity
of the production facilities. Unallocated overheads must be
recognized as an expense in the period in which they are
incurred. SFAS No. 151 is effective for inventory
costs incurred during fiscal years beginning after June 15,
2005. We have not yet determined what the effects of adopting
this standard will have on us.

On December 16, 2004, the FASB issued
SFAS No. 152, Accounting for Real Estate
Time-Sharing Transactions, an amendment of FASB Statements
No. 66 and 67, which is effective for fiscal years
beginning after June 15, 2005. Since this statement does
not apply to our business, we believe it will not have any
impact on our financial statements.

On December 16, 2004, the FASB issued
SFAS No. 153, Exchanges of Nonmonetary Assets,
an amendment of APB Opinion No. 29.
SFAS No. 153 replaces the exception from fair value
measurement in APB Opinion No. 29 for nonmonetary exchanges
of similar productive assets with a general exception from fair
value measurement for exchanges of nonmonetary assets that do
not have commercial substance. A nonmonetary exchange has
commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange.
SFAS No. 153 is to be applied prospectively, and is
effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after the date of issuance of
SFAS No. 153. We have not yet determined what the
effects of adopting this standard will have on us.

On December 16, 2004, the FASB issued
SFAS No. 123(R), Share-Based Payment, that
replaces SFAS No. 123 and will require compensation
costs related to share-based payment transactions to be
recognized in the financial statements.
SFAS No. 123(R) is effective for public entities,
other than small business issuers, as of the first interim or
annual reporting period that begins after June 15, 2005.
Since this statement does not apply to our business, we believe
it will not have any impact on our financial statements.

A pending pronouncement, Emerging Issues Task
Force (EITF) 04-10, Determining Whether to Aggregate
Operating Segments That Do Not Meet the Quantitative
Thresholds was discussed on September 29-30, 2004,
and was ratified by the FASB on October 13, 2004. EITF
04-10 would provide guidance on the aggregation criteria found
in SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. Although the FASB
ratified the consensus in EITF 04-10, the FASB staff is in
the process of drafting a proposed FASB Staff Position (FSP) to
provide guidance in determining whether two or more operating
segments have similar economic characteristics and has delayed
the effective date indefinitely pending the issuance of this
FSP. We have not yet determined what effect this pronouncement
will have on us.






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

We did not experience any material changes in
market risk exposures for the period ended November 30,
2004, that materially affect the quantitative and qualitative
disclosures presented in our Annual Report on Form 10-K for
the year ended August 31, 2004.

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|        |                        
|------- | -----------------------
|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 our
disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934
(the Exchange Act)) as of November 30, 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 first quarter ended November 30,
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 1. | Not applicable



|        |               
|------- | --------------
|Item 2. | Not applicable



|        |               
|------- | --------------
|Item 3. | Not applicable



|        |               
|------- | --------------
|Item 4. | Not applicable



|        |               
|------- | --------------
|Item 5. | Not applicable






|        |         
|------- | --------
|Item 6. | Exhibits

|        |    |             |  |  |  |                                                                                                                                                                                              
|------- | -- | ----------- |  |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |    |            
|Exhibit |    | Description
|        |    |            
|        | 3  | .1          |  |  |  | Resolution of our Board of Directors to amend our
    Bylaws (incorporated by reference to Exhibit 3.1 to our
    Current Report on Form 8-K filed December 15, 2004)                        
|        | 10 | .1          |  |  |  | Note Purchase Agreement for Series H
    Senior Notes dated September 21, 2004 (incorporated by
    reference to Exhibit 10.1 to our Current Report on
    Form 8-K filed September 22, 2004)
|        | 10 | .2          |  |  |  | Deferred Compensation Plan (incorporated by
    reference to Exhibit 4.1 to our Registration Statement on
    Form S-8 (File No. 333-121161), filed on
    December 10, 2004)                
|        | 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                                                               

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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     

January 12, 2005

(Date)


32