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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

Commission File Number 0-50150

CHS Inc.

(Exact name of registrant as specified in its charter)

      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.

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INDEX

PART I. FINANCIAL INFORMATION

SAFE HARBOR STATEMENT UNDER THE PRIVATE

SECURITIES LITIGATION REFORM ACT OF 1995

      This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties that may cause the Company’s actual results to differ materially from the results discussed in the forward-looking statements. These factors include those set forth in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, under the caption “Cautionary Statement Regarding Forward-Looking Statements” to this Quarterly Report on Form 10-Q for the quarterly period ended February 28, 2005.

Item 1.     Financial Statements

CHS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

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

CHS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

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

CHS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

CHS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(dollars in thousands)

      The unaudited consolidated balance sheets as of February 28, 2005 and February 29, 2004, and the statements of operations and cash flows for the three and six months ended February 28, 2005 and February 29, 2004 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 was $18.5 million, $26.9 million and $27.1 million on February 28, 2005, August 31, 2004 and February 29, 2004, respectively, and is included in other assets in the consolidated balance sheets. During the three months ended February 28, 2005, we impaired goodwill related to our frozen prepared Mexican foods operation in Fort Worth, Texas by a pretax amount of $8.4 million.

      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 $14.2 million as of February 28, 2005. Intangible assets of $10 thousand and $179 thousand (non-cash) were acquired during the six months ended February 28, 2005 and February 29, 2004, respectively. Total amortization expense for intangible assets during the three-month and six-month periods ended February 28, 2005 and February 29, 2004, was $0.8 million and $0.8 million, respectively, and $1.6 million and $1.2 million, respectively. The estimated amortization expense related to intangible assets subject to amortization for the next five years will range from $1.6 million to $2.9 million.

      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

CHS INC. AND SUBSIDIARIES

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

current-period charges regardless of whether they meet the “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. 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 June 15, 2005. We have not yet determined what the effects of adopting this standard will have on us.

      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.

      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.

CHS INC. AND SUBSIDIARIES

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

      Included in other current assets on February 28, 2005, August 31, 2004 and February 29, 2004 are derivative assets of $63.7 million, $91.3 million and $234.7 million, respectively. Included in accrued expenses on February 28, 2005, August 31, 2004 and February 29, 2004 are derivative liabilities of $81.7 million, $110.8 million and $189.1 million, respectively.

      During the three months ended February 28, 2005, we sold an investment held in the Corporate and Other segment for proceeds of $7.4 million and recorded a gain of $3.4 million.

      In November 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 on that date consisted 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 fiscal 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 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 February 28, 2005, August 31, 2004 and February 29, 2004 and statements of operations for the three-month and six month periods as indicated below.

CHS INC. AND SUBSIDIARIES

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

      During the three months ended February 28, 2005, we reduced the carrying value of our Newton, North Carolina Mexican foods facility by recording a pretax impairment charge of $5.0 million.

      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.

CHS INC. AND SUBSIDIARIES

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

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

      During the three months ended February 28, 2005 we redeemed $20.0 million of our capital equity certificates by issuing shares of our 8% Cumulative Redeemable Preferred Stock.

      Total comprehensive income primarily consists of net income, additional minimum pension liability and cash flow hedges. For the three months ended February 28, 2005 and February 29, 2004, total comprehensive income amounted to $7.2 million and $10.3 million, respectively. For the six months ended February 28, 2005 and February 29, 2004, total comprehensive income amounted to $27.9 million and $61.6 million, respectively. Accumulated other comprehensive loss on February 28, 2005, August 31, 2004 and February 29, 2004 was $6.0 million, $7.1 million and $16.0 million, respectively.

CHS INC. AND SUBSIDIARIES

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

      Employee benefit information for the three and six months ended February 28, 2005 and February 29, 2004 is as follows:

      As of February 28, 2005, we expect to make a $9.1 million contribution to our pension plan during the year ended August 31, 2005. This anticipated contribution would be made by the National Cooperative Refinery Association (NCRA), of which we own approximately 74.5%.

      On January 1, 2005, we realigned our business segments based on an assessment of how our businesses operate and the products and services they sell. As a result of this assessment, leadership changes were made, including the naming of a new executive vice president and chief operating officer, so that we now have three chief operating officers to lead our three business segments; Energy, Ag Business

CHS INC. AND SUBSIDIARIES

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

and Processing. Prior to the realignment, we operated five business segments; Agronomy, Energy, Country Operations and Services, Grain Marketing, and Processed Grains and Foods.

      The Energy segment derives its revenues through refining, wholesaling and retailing of petroleum products. The Ag Business segment derives its revenues through the origination and marketing of grain, including service activities conducted at export terminals, through the retail sales of petroleum and agronomy products, processed sunflowers, feed and farm supplies, and from investment income in our agronomy joint ventures and other investments. The Processing segment derives its revenues from the sales of soybean meal and soybean refined oil, from equity income in two wheat milling joint ventures, and from equity income in an oilseed food manufacturing and distribution joint venture. We have moved other business operations previously included in our operating segments to corporate and other because of the nature of their products and services, as well as the relative revenue size of those businesses. These businesses include our insurance, hedging and other service activities related to crop production that were previously included in the Country Operations and Services segment ($30.9 million of revenues during the twelve months ended August 31, 2004), and our Mexican foods business previously included in our Processed Grains and Foods segment ($70.9 million of revenues during the twelve months ended August 31, 2004).

      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-symmetrical. 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.

      Segment information for the three and six months ended February 28, 2005 and February 29, 2004 is as follows:

CHS INC. AND SUBSIDIARIES

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

CHS INC. AND SUBSIDIARIES

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

      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 $76.3 million has been spent at our Laurel refinery and $192.6 million has been spent by NCRA at the McPherson refinery as of February 28, 2005. We expect these compliance projects at the refineries to be complete by December 31, 2005, and anticipate funding them with a combination of cash flows from operations and debt proceeds.

      We are a guarantor for lines of credit for related companies, of which $31.8 million was outstanding as of February 28, 2005. 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 February 28, 2005.

      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 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.

CHS INC. AND SUBSIDIARIES

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

      Our obligations pursuant to our guarantees as of February 28, 2005 are as follows:

Cautionary Statement Regarding Forward-Looking Statements

      The information in this Quarterly Report on Form 10-Q for the quarterly period ended February 28, 2005, 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:

      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 $76.3 million had been spent at our Laurel refinery and $192.6 million had been spent by NCRA at the McPherson refinery as of February 28, 2005. We expect all of these compliance projects at the refineries to be completed by December 31, 2005, and anticipate funding them 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

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:

      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.

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 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 regions of the United States. These grains and oilseeds are either sold to domestic and international customers, or further processed into a variety of grain-based products.

      We operate our businesses predominantly in the United States in three distinct segments: Energy, Ag Business and Processing. Together these business segments create vertical integration to link producers with consumers. The Energy segment produces and provides for the wholesale distribution of energy products. The Ag Business segment serves as our Company-owned retailer of energy, agronomy and other crop production inputs, and purchases and resells grains and oilseeds from member cooperatives and third parties, and holds our 50% equity ownership interests in Agriliance, LLC, a wholesale distributor of agronomy products. The Processing segment converts grains and oilseeds into value-added products.

      Corporate administrative expenses are allocated to all business segments based on either direct usage for services that can be tracked, such as information technology and legal services, or other factors and considerations relevant to the costs incurred.

      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 Ag Business segment experiences higher volumes and income during the spring planting season and in the fall, which corresponds to producer harvest. Other factors affecting the Ag Business segment volumes and profitability include 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 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, in the Ag Business segment, 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 six months ended February 28, 2005 when compared to the same 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

      General. We recorded pretax earnings of $2.1 million during the three months ended February 28, 2005 compared to $9.5 million in the three months ended February 29, 2004, a decrease of $7.4 million (78%).

      Our Energy segment generated pretax earnings of $19.1 million for the three months ended February 28, 2005 compared with pretax losses of $8.4 million for the three months ended February 29, 2004. This increase in earnings of $27.5 million is primarily attributable to higher margins on refined fuels, which resulted mainly from increased global demand, but were partially offset by decreased propane earnings, compared to the same three-month period of the previous year. The most significant contributing factor for the decrease in propane earnings was reduced volumes due to a warmer winter compared to last year.

      Our Ag Business segment generated pretax losses of $1.8 million for the three months ended February 28, 2005 compared to pretax earnings of $6.3 million for the three months ended February 29, 2004. This decrease in earnings of $8.1 million (129%) is primarily related to earnings decline of $11.3 million in our agronomy equity investments, partially offset by improved earnings of $2.2 million from our country operations and grain marketing operations.

      Our Processing segment generated pretax losses of $0.4 million for the three months ended February 28, 2005 compared to pretax earnings of $11.1 million for the three months ended February 29, 2004, a decrease in earnings of $11.5 million (104%). Oilseed processing earnings decreased $4.1 million, which was primarily the result of lower crushing margins, partially offset by improved oilseed refining margins. Because of lower ocean freight rates at west coast export facilities compared to ocean freight at other domestic export facilities, soybeans grown in proximity to our crushing plants were in high demand for export to Asia during the three and six months ended February 28, 2005. This situation had the effect of increasing the price of soybeans available for processing at crushing plants in southwestern Minnesota compared to the price of soybeans available to crushers in other geographical areas, thus reducing soybean meal margins at our two facilities. We anticipate that this situation will improve as the South American soybean crop is harvested and Asian soybean crushing companies have access to another source of soybeans. Another factor affecting the increase in soybean prices was that the Minnesota harvest was below that of the previous years’ harvests. Our share of earnings from Ventura Foods, our packaged foods joint venture, decreased $6.7 million compared to the prior year. Also, our share of earnings from Horizon Milling, our wheat milling joint venture, decreased $1.2 million for the three months ended February 28, 2005 compared to the three months ended February 29, 2004.

      Our Corporate and Other segment generated pretax losses of $14.7 million for the three months ended February 28, 2005 compared to pretax earnings of $0.5 million for the three months ended February 29, 2004, a decrease in earnings of $15.2 million. Our Mexican foods operations had increased losses of $3.0 million which includes repositioning costs. Also included in the pretax loss for the fiscal quarter is a $13.4 million impairment charge to reduce the carrying value of our Newton, North Carolina

Mexican foods facility and intangible assets related to our frozen prepared Mexican foods operations in Fort Worth, Texas. The net effect of the impairment to income after taxes was $8.2 million. Business solutions had decreased earnings of $2.2 million, and corporate had a $3.4 million gain on a sale of an investment which partially offset the losses as compared to the previous years three-month period ended February 29, 2004.

      Net Income. Consolidated net income for the three months ended February 28, 2005 was $8.7 million compared to $8.5 million for the three months ended February 29, 2004, which represents a $0.2 million (2%) increase in earnings.

      Net Sales. Consolidated net sales of $2.4 billion for the three months ended February 28, 2005 compared to $2.7 billion for the three months ended February 29, 2004, which represents a $246.8 million (9%) decrease.

      Our Energy segment net sales, including elimination of intersegment sales, of $1.1 billion increased $249.5 million (28%) during the three months ended February 28, 2005 compared to the three months ended February 29, 2004. During the three months ended February 28, 2005 and February 29, 2004, the Energy segment recorded sales to the Ag Business segment of $34.5 million and $28.3 million, respectively. Intersegment sales are eliminated in deriving consolidated sales but are included for segment reporting purposes. The net sales increase of $249.5 million is comprised of an increase of $258.2 million related to price appreciation on refined fuels and propane products, partially offset by $8.7 million in reduced sales volume. Reduced volumes are primarily a decrease in propane products, partially offset by increased volumes of refined fuels. On a more product-specific basis, we own and operate two crude oil refineries where we produce approximately 60% of the refined fuels that we sell and we purchase the balance from other United States refiners and distributors. Refined fuels net sales increased $216.1 million (42%), of which $161.9 million was related to a net average selling price increase and $54.2 million was related to increased volumes. The sales price of refined fuels increased $0.31 per gallon (32%) and volumes increased 8% when comparing the three months ended February 28, 2005 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 $11.6 million (5%), of which $48.5 million was related to a net average selling price increase, partially offset by $36.9 million, which was due to decreased volumes compared to the same three-month period in the previous year. Propane prices increased $0.15 per gallon (21%) and sales volume decreased 13% in comparison to the same period of the prior year. Higher propane prices are reflective of the crude oil price increases during the three months ended February 28, 2005 compared to the same period in 2004. The propane volume decrease is primarily reflective of a warmer winter and reduced home heating use as compared to the three months ended February 29, 2004.

      Our Ag Business segment net sales, including elimination of intersegment sales, of $1.1 billion decreased $450.7 million (28%) during the three months ended February 28, 2005 compared to the three months ended February 29, 2004. Grain net sales in the Ag Business segment totaled $995.8 million and $1,449.6 million during the three months ended February 28, 2005 and February 29, 2004, respectively. The net sales decrease of $453.8 million is attributable to decreased volumes accounting for $292.7 million and $161.1 million related to decreased average selling grain prices, during the three months ended February 28, 2005 compared to the same period last fiscal year. Volumes decreased 23% during the three months ended February 28, 2005 compared with the same period of a year ago. Corn, soybeans and winter wheat reflected the largest volume decreases compared to the three months ended February 29, 2004. The average sales price of all grain and oilseed commodities sold reflected a decrease of $0.40 per bushel (7%). Commodity prices in general decreased due to a strong fall 2004 harvest that produced good yields throughout most of the United States 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 $2.90, $0.67 and $0.66, respectively, less than the prices on those same grains as compared to the three months ended February 29, 2004. The decreases in our grain volumes are offset by increased volumes in our two Pacific Northwest export equity investments. Ag Business segment non-grain net sales of $136.9 million increased by $3.1 million (2%) during the three months ended February 28, 2005 compared to the three months ended February 29, 2004, primarily the result of increased sales of energy, partially offset by decreased

feed sales. The average selling price of energy products increased due to overall market conditions while volumes were fairly consistent to the three months ended February 29, 2004.

      Our Processing segment net sales, including elimination of intersegment sales, of $132.3 million decreased $44.2 million (25%) during the three months ended February 28, 2005 compared to the three months ended February 29, 2004. Oilseed processing sales decreased $44.2 million (25%), of which $36.7 million was due to lower average sales price and $7.5 million was due to reduced sales volumes. The average selling price of processed oilseed decreased $65 per ton and the average selling price of refined oilseed products decreased $0.03 per pound compared to the same three-month period of the previous year. The volume decrease is primarily due to 4% fewer bushels processed. The change in price is primarily related to overall global market conditions for soybean meal and oil.

      Our Corporate and Other segment net sales of $15.4 million decreased $1.4 million (8%) during the three months ended February 28, 2005 compared to the three months ended February 29, 2004 and is solely comprised of our Mexican foods operations.

      Other Revenues. Other revenues of $34.8 million increased $0.3 million (1%) during the three months ended February 28, 2005 compared to the three months ended February 29, 2004. The majority of our other revenue is generated within our Ag Business and Corporate and Other segments. Our Ag Business segment’s country operations elevator and agri-service centers receives 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, and our grain marketing operations receives other revenues at our export terminals from activities related to loading vessels. Other revenues within the Ag Business segment increased $0.8 million (4%), which were partially offset by the Corporate and Other segment decrease of $1.4 million (14%), which includes reduced commissions on insurance services and commodity hedging. Our Energy segment other revenues increased $1.1 million.

      Cost of Goods Sold. Cost of goods sold of $2.4 billion decreased $276.0 million (10%) during the three months ended February 28, 2005 compared to the three months ended February 29, 2004.

      Our Energy segment cost of goods sold, including elimination of intersegment, of $1.1 billion increased by $222.9 million (26%) during the three months ended February 28, 2005 compared to the same period of the prior year, primarily due to increased average costs of refined fuels and propane products. On a more product-specific basis, the average cost of refined fuels increased by $0.27 (27%) per gallon and volumes increased 8% compared to the three months ended February 29, 2004. 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 February 29, 2004. The average per unit cost of crude oil purchased for the two refineries increased 26% compared to the three months ended February 29, 2004. 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 $0.16 (23%) per gallon, offset by a 13% decrease in volumes compared to the three months ended February 29, 2004. The average price of propane increased due to higher input costs and relates to global demand, and volumes decreased due to a warmer winter, which caused reduced home heating demand compared to the same period in the previous year.

      Our Ag Business cost of goods sold, including elimination of intersegment, of $1.1 billion decreased $458.5 million (29%) during the three months ended February 28, 2005 compared to the same period of the prior year. Grain cost of goods sold in our Ag Business segment totaled $977.1 million and $1,438.4 million during the three months ended February 28, 2005 and February 29, 2004, respectively. Grains and oilseed procured through our Ag Business segment decreased (32%) compared to the three months ended February 29, 2004, primarily the result of a 23% decrease in volumes and $0.55 (12%) average cost per bushel decrease as compared to the prior year. Corn, soybeans and winter wheat reflected the largest volume decreases compared to the three months ended February 29, 2004. Volumes of corn, soybeans and winter wheat have decreased, primarily as a result of global demand. Commodity prices on soybeans, spring wheat and corn have decreased compared to the high prices that were prevalent during

the majority of fiscal 2004. Ag Business segment cost of goods sold, excluding the cost of grains procured through this segment increased primarily due to energy products, partially offset by decreased cost of feed products. The average cost of energy products increased due to overall market conditions while volumes stayed fairly consistent to the three months ended February 29, 2004.

      Our Processing segment cost of goods sold, including elimination of intersegment, of $130.7 million decreased $41.2 million (24%) compared to the three months ended February 29, 2004, which was primarily due to decreased input cost of soybeans processed at our two crushing plants.

      Our Corporate and Other segment cost of goods sold of $15.8 million increased $0.8 million (6%) compared to the three months ended February 29, 2004, and is solely comprised of our Mexican foods operations.

      Marketing, General and Administrative. Marketing, general and administrative expenses of $58.3 million for the three months ended February 28, 2005 increased by $7.2 million (14%) compared to the three months ended February 29, 2004. The net increase is primarily due to higher administrative costs in our Ag Business segment and inflation.

      Gain on Sale of Investment. During the second quarter of fiscal 2005, our Corporate and Other segment sold stock in an investment, we received cash of $7.4 million from the sale and recorded a gain of $3.4 million.

      Gain on Legal Settlements. Our Ag Business segment received cash of $0.4 million during the three months ended February 29, 2004 from the settlement of a class action lawsuit alleging illegal price fixing against various feed vitamin product suppliers.

      Interest. Interest expense of $13.0 million for the three months ended February 28, 2005 decreased $0.4 million (3%) compared to the three months ended February 29, 2004. The average level of short-term borrowings decreased $386.0 million and was partially offset by the average short-term interest rate increase of 1.0% during the three months ended February 28, 2005 compared to the same period in 2004.

      Equity Loss (Income) from Investments. Equity loss from investments of $0.2 million for the three months ended February 28, 2005 unfavorably changed by $18.2 million (101%) compared to the three months ended February 29, 2004. 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 change in equity loss (income) from investments was primarily attributable to decreased earnings from investments within our Ag Business segment of $11.1 million and Processing segment of $7.9 million, which are partially offset by increased earnings of $0.7 million from investments within our Energy segment.

      Our Ag Business segment generated reduced earnings of $11.1 million from equity investments. Losses in our equity investment in Agriliance increased $12.4 million and are primarily attributable to losses in the retail operations of that 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 2004 as a result of increased vendor rebates and competitive allowances; 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 were up 5% over last year. Southern retail operations losses increased compared to the same period in 2004 as a result of adverse weather conditions in the southeastern region of the United States, partially offset by an improvement in a Canadian joint venture earnings of $1.1 million. Equity earnings in other Ag Business segment joint ventures were essentially unchanged compared to the same three-month period in the previous year.

      Our Processing segment generated reduced earnings of $7.9 million from equity investments. Ventura Foods, our oilseed-based products and packaged foods joint venture, recorded decreased earnings of $6.7 million and Horizon, our wheat milling joint venture, recorded decreased earnings of $1.2 million

compared to the same three months in the previous year, primarily as a result of reduced margins due to higher input costs.

      Our Energy segment generated improved earnings of $0.7 million related to improved pipeline margins in an NCRA equity investment.

      Loss on Impairments of Assets. We recorded a pretax impairment loss on our Newton, North Carolina Mexican foods facility and intangible assets related to our frozen prepared Mexican foods operations of $13.4 million during the three months ended February 28, 2005.

      Minority Interests. Minority interests of $4.7 million for the three months ended February 28, 2005 increased by $1.5 million (47%) compared to the three months ended February 29, 2004. This increase was primarily a result of more profitable operations within our majority-owned subsidiaries compared to the three months ended February 29, 2004. Substantially all minority interests relate to NCRA, an approximately 74.5% owned subsidiary which we consolidate in our Energy segment.

      Income Taxes. Income tax benefit of $6.6 million for the three months ended February 28, 2005 compares with income tax expense of $1.0 million for the three months ended February 29, 2004. Excluding the Mexican foods impairments previously discussed, the resulting effective tax rates for the three months ended February 28, 2005 and February 29, 2004 were (8.9%) and 10.2%, respectively. The federal and state statutory rate applied to nonpatronage business activity was 38.9% for the periods ended February 28, 2005 and February 29, 2004. The income taxes and effective tax rate vary each period upon profitability and nonpatronage business activity during each of the comparable periods.

      General. We recorded pretax earnings of $25.1 million during the six months ended February 28, 2005 compared to $67.8 million in the six months ended February 29, 2004, a decrease of $42.7 million (63%). This decrease is attributable to impairment charges we considered appropriate for under-performing assets. These assets consist of our investment in CF Industries, for which we recorded a $35.0 million charge in the first quarter of the current fiscal year ($32.1 million after taxes) and a $13.4 million charge ($8.2 million after taxes) during the current fiscal quarter to reduce the carrying value of our Newton, North Carolina Mexican foods facility and intangible assets related to our frozen prepared Mexican foods operations in Fort Worth, Texas.

      Our Energy segment generated pretax earnings of $58.2 million for the six months ended February 28, 2005 compared with $28.8 million for the six months ended February 29, 2004. This increase in earnings of $29.4 million (102%) is primarily attributable to higher margins on refined fuels, which resulted mainly from increased global demand, but were partially offset by decreased propane earnings, compared to the same six-month period of the previous year.

      Our Ag Business segment generated pretax losses of $22.6 million for the six months ended February 28, 2005 compared to earnings of $12.4 million for the six months ended February 29, 2004. The activity in this segment includes our proportionate share of losses from our agronomy related investments. The decrease in earnings of $35.0 million is primarily due to a $35.0 million impairment of our investment in CF Industries, Inc. During the first quarter of fiscal year 2005, 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 by $35.0 million with an impairment charge to income during the fiscal quarter ended November 30, 2004. Our proportionate share of earnings from our other agronomy equity investments decreased by $8.8 million for the six months ended February 28, 2005 compared to the same period in