UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x       Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended August 31, 2009

or

o        Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Nos. 33-83868; 333-11693 and 333-32251

AMERICAN CRYSTAL SUGAR COMPANY

(Exact name of registrant as specified in its charter)

Securities registered pursuant to Section 12(b) of the Act:

NONE

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

NONE

Indicate by check mark if the registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  o  No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes  o  No  x

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES  o  NO  o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one)

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

As of October 29, 2009, 2,812 shares of the Registrant’s Common Stock and 498,570 shares of the Registrant’s Preferred Stock were outstanding.  There is no established public market for the Registrant’s Common Stock or Preferred Stock.  Although there is a limited, private market for shares of the Registrant’s stock, the Registrant does not obtain information regarding the transfer price in transactions between its members and therefore is unable to estimate the aggregate market value of the Registrant’s shares held by non-affiliates.

DOCUMENTS INCORPORATED BY REFERENCE

NONE

PART I

This report contains forward-looking statements and information based upon assumptions by the American Crystal Sugar Company’s management, including assumptions about risks and uncertainties faced by the Company.  These forward-looking statements can be identified by the use of forward-looking terminology such as “expects”, “believes”, “will” or similar verbs or expressions.  If any of management’s assumptions prove incorrect or should unanticipated circumstances arise, the Company’s actual results could materially differ from those anticipated by such forward-looking statements.  The differences could be caused by a number of factors or combination of factors, including, but not limited to, those factors influencing the Company and its business which are described in this report in the “Risk Factors” section below.  Readers are urged to consider these factors when evaluating any forward-looking statement.  The Company undertakes no obligation to update any forward-looking statements in this report to reflect future events or developments.

Item 1.                                        BUSINESS

GENERAL

The Company is a Minnesota agricultural cooperative corporation owned by approximately 2,800 sugarbeet growers in the Minnesota and North Dakota portions of the Red River Valley.  The Red River Valley is the largest sugarbeet growing area in the United States, forming a band approximately 35 miles wide on either side of the North Dakota and Minnesota border and extending approximately 200 miles south from the border of the United States and Canada.  The Company was organized in 1973 by sugarbeet growers to acquire the business and assets of the American Crystal Sugar Company, then a publicly held New Jersey corporation in operation since 1899.  The Company’s Board of Directors establishes sugarbeet acreage planting requirements in the Red River Valley (the Red River Valley Crop) each year based on factory processing capacity, expected crop quality, government regulations and other factors.  Based on the tons of sugarbeets required to meet sugar production levels, the total authorized acres to be planted are allocated ratably to each preferred share held by the members.  The Company processed sugarbeets from approximately 408,000 acres for the 2008 crop and expects to process sugarbeets from approximately 445,000 acres for the 2009 crop.  By owning and operating five sugarbeet processing facilities in the Red River Valley, the Company provides its shareholders with the ability to process their sugarbeets into sugar and agri-products such as: molasses; sugarbeet pulp; and by-products of the molasses desugarization process, betaine and concentrated separated by-product (CSB).

The Company, through its wholly-owned subsidiary, Sidney Sugars Incorporated (Sidney Sugars), owns two sugarbeet processing facilities.  At the Sidney, Montana, facility, the Company processed non-member sugarbeets from approximately 15,000 acres for the 2008 crop and expects to process from approximately 25,000 acres for the 2009 crop.  The Torrington, Wyoming, facility has been leased on a long-term basis to another sugar producer.

The Company, through its wholly-owned subsidiary, Crab Creek Sugar Company (Crab Creek), controls the long-term production of sugar at a sugarbeet processing facility at Moses Lake, Washington.  Neither Crab Creek nor the Company currently operates or intends to operate the Moses Lake facility.

The Company is the controlling member of ProGold Limited Liability Company (ProGold), which owns a corn wet-milling plant in Wahpeton, North Dakota, that is currently being leased to Cargill, Incorporated (Cargill).  On November 6, 2007, ProGold entered into an amended lease agreement with Cargill that superseded and replaced the previous 10 year lease between ProGold and Cargill and provides that (1) Cargill will pay ProGold average annual rental payments equal to $21,900,000, and (2) that the term of the lease be extended until December 31, 2017.

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On May 1, 2007, the Company acquired CIT Capital USA Inc.’s  50 percent ownership interest in Crystech, LLC (Crystech) resulting in the Company’s 100 percent ownership of Crystech.  Crystech owned the molasses desugarization facility adjacent to the Company’s processing facility in Hillsboro, North Dakota.  Effective May 31, 2007, Crystech was dissolved with all assets and liabilities transferred to the Company.

The Company’s sugar marketing agent, United Sugars Corporation (United), is a cooperative owned by the Company, Minn-Dak Farmers Cooperative and United States Sugar Corporation.  The Company’s agri-products are marketed through a marketing agent, Midwest Agri-Commodities Company (Midwest).  Midwest is a cooperative owned by the Company, Minn-Dak Farmers Cooperative, Southern Minnesota Beet Sugar Cooperative and Michigan Sugar Company.

Operating Segments

The Company has identified two reportable operating segments: Sugar and Leasing.  The Sugar segment is engaged primarily in the production and marketing of sugar from sugarbeets.  It also sells agri-products and sugarbeet seed.  The Leasing segment is engaged in the leasing of a corn wet milling plant used in the production of high-fructose corn syrup.  For financial information by segment see Note 12 of “Notes to the Consolidated Financial Statements.”

Principal Products Produced

The Company is engaged primarily in the production and marketing of sugar from sugarbeets.  Total sugar sales accounted for 85.6 percent, 87.1 percent and 88.6 percent of the Company’s consolidated total revenues for the years ended August 31, 2009, 2008 and 2007, respectively.  United Sugars Corporation, the Company’s sugar marketing agent, sells sugar primarily to industrial users such as confectioners, breakfast cereal manufacturers and bakeries.  For the fiscal year ended August 31, 2009, 87.4 percent (by weight) of the sugar was sold to industrial users.  The remaining portion is marketed by United Sugars Corporation to wholesalers and retailers under the “Crystal Sugar” and various private labels for household consumption.  With regard to brand name sales, the Company licenses the use of the “Crystal” trademark to United Sugars Corporation.

The majority of United Sugars Corporation’s sugar sales are contracted one or more quarters in advance.

The Company also sells agri-products such as: molasses; sugarbeet pulp; betaine and concentrated separated by-product (CSB), by-products of the molasses desugarization process; and sugarbeet seed.  Substantially all of the Company’s agri-products are marketed through Midwest Agri-Commodities Company, a common marketing agency.  Sugarbeet pulp is marketed to livestock feed mixers and livestock feeders in the United States and foreign markets.  A large proportion of the Company’s pulp production is exported to Japan and Europe.  The market for sugarbeet pulp is affected by the availability and quality of competitive feedstuffs and foreign exchange rates.  Sugarbeet molasses is marketed primarily to yeast manufacturers, livestock feed mixers and livestock feeders.  Total agri-product sales accounted for 10.4 percent of the Company’s consolidated total revenues during fiscal 2009, of which export agri-product sales accounted for 4.8 percent of such revenues.  Agri-products sales accounted for 9.9 percent and 8.8 percent of the Company’s consolidated total revenues in fiscal 2008 and fiscal 2007, respectively, while agri-product export sales accounted for 4.4 percent and 3.3 percent of the Company’s total revenues in fiscal 2008 and fiscal 2007, respectively.

There is no single customer of United or Midwest attributable to the Company that accounts for 10 percent or more of the revenues of the Company.

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The Company’s total annual sugar and agri-product production is influenced by the amount and the quality of sugarbeets grown by its members and non-members, the processing capacity of the Company’s plants, by its ability to store harvested sugarbeets and by government programs and regulations.

Raw Materials

The Company purchases all of its Red River Valley sugarbeets from members under contract with the Company.  All members are party to a five year contract for the 2008 through 2012 crop years which will automatically renew for additional five-year terms unless terminated by one of the parties at the end of the current term.  In addition, each member has an annual contract with the Company specifying the number of acres the member is obligated to grow during that year.  Each share of Preferred Stock held by a member requires that member to grow one acre of sugarbeets, subject to the planting tolerance, for sale to the Company.  The Company’s Board of Directors has the discretion to adjust the acreage that is required to be planted for each share of Preferred Stock held by the members.  The Company’s Board of Directors set the planting tolerance for the 2009 crop year at .83 acres per share of preferred stock, with a planting tolerance of minus .03 or plus .09 (.80 minimum and .92 maximum).  Based on current market conditions and processing capacity, the Company estimates planting tolerances for the 2010 crop year and beyond will be in the range of .80 to .85 acres per Preferred Share.  The Board of Directors and management regularly review and determine the relationship between the ownership of Preferred Stock and acreage planting.

The gross beet payment is the value of recovered sugar from the sugarbeets a member delivers plus the member’s share of agri-product revenues, minus the member’s share of member business operating costs.  The following allowances, costs and deductions, if applicable, are used to adjust the gross beet payment to arrive at the net beet payment: hauling program allowance and costs, pre-pile quality premium and costs, tare incentive premium/penalty program, late harvest program costs and unit retains.  Members are paid a hauling allowance based on the distance they must transport sugarbeets for delivery to the Company and may also receive an allowance for early delivery of sugarbeets prior to the commencement of the stockpiling of harvested sugarbeets.  The costs of these programs are shared among members on the basis of the net tonnage of sugarbeets delivered by each member.

Under the grower contracts, payments to members for sugarbeets must be made in at least three installments: (i) on or about November 15, the Company pays its members an amount equal to 65 percent of the Company’s estimate of the member’s net beet payment; (ii) on or about March 31, the Company pays an amount, which combined with the November payment, equals 90 percent of the member’s estimated net beet payment; (iii) and not more than 15 days after completion and acceptance of the audit of the Company’s annual consolidated financial statements by the Board of Directors, the Company pays the remainder of the member’s net beet payment.  Except for unit retains, the Company must pay to its members for their sugarbeets all proceeds from the sale of the members’ sugar and agri-products in excess of related member business operating costs, as described above.

All of the sugarbeets processed at the Sidney, Montana, factory are purchased from non-member growers under contract with Sidney Sugars.  Each non-member grower has an annual contract with Sidney Sugars specifying the number of acres the non-member grower is obligated to grow during each year.

The price per ton of sugarbeets paid to the growers who deliver to Sidney Sugars (the Scale Payment) is determined according to the sugarbeet payment scale contained in the grower contract and is calculated based on Sidney Sugars’ average net return for sugar from that year’s crop, the adjusted average sugar content of each grower’s sugarbeets and sugarbeet storage results.

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Under grower contracts between Sidney Sugars and its growers, payments to these growers for sugarbeets must be made in three installments following delivery of the crop: (i) in November, Sidney Sugars pays the growers an amount equal to 65 percent of the estimated Scale Payment for that year’s crop; (ii) in April, Sidney Sugars pays an amount, which combined with the November payment, equals 90 percent of the estimated Scale Payment for that year’s crop; (iii) and in October, Sidney Sugars pays the remainder of the actual Scale Payment.

Seasonality

The period during which the Company’s plants are in operation to process sugarbeets into sugar and agri-products is referred to as the “campaign.”  During the campaign, the Company’s factories operate twenty-four hours per day, seven days per week.  In the Red River Valley, the campaign typically begins in September and continues until the available supply of sugarbeets has been depleted, which generally occurs in May of the following year.  Based on current processing capacity, an average campaign lasts approximately 250 days, assuming normal crop yields.  At the Sidney, Montana factory, the campaign begins in late September or early October.  Due to a reduction in acres planted by the non-member growers, the 2009 campaign at the Sidney, Montana factory lasted approximately 60 days while the 2010 campaign, due to an increase in the acres planted, is expected to last approximately 100 days.

The sales of sugar and agri-products occur ratably throughout the year with modest increases in sugar sales occurring prior to holiday seasons.

Sales Backlog

The backlog of any unfilled sales orders at August 31, 2009 and 2008, was not material to the Company.

Market and Competition

Current United States government statistics estimate total United States sugar consumption at approximately 204 million hundredweight for the year beginning October 1, 2008 and ending September 30, 2009.  For the same period ending September 2008, total consumption was approximately 201 million hundredweight.  Comparing the two years shows an increase in demand of approximately one percent.

The United States refined sugar market has grown over the past twenty years, despite the demand lost to the substitution of high fructose corn syrups for sugar in beverages and certain food products.  Non-nutritive sweeteners such as aspartame have also been developed to substitute for sugar.  Corn sweeteners and non-nutritive sweeteners constitute a large portion of the overall sweetener market.  The Company believes that the United States market for sugar will reflect minimal increases or be relatively flat in the near future.

The United States sugar industry has been subject to industry consolidation.  Today, there are fewer than 10 sugar sellers, with approximately 68 percent of United States sugar market share concentrated in the top three sellers.  The Company’s sugar production and sales represent approximately 15 percent of the total domestic market for refined sugar in 2008/2009.  The Company had the right to market, or to have marketed on its behalf, approximately 35 million hundredweight of sugar from the 2008 crop.  Sugar sales by United Sugars Corporation, the Company’s marketing agent, represent approximately 25 percent of the United States sugar market.

United is currently the second largest marketer of sugar in the United States. Main competitors in the domestic market are: The American Sugar Refining Company; Imperial Sugar Company; Cargill, Incorporated; The Amalgamated Sugar Company LLC; Michigan Sugar Company; and The Western

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Sugar Cooperative.  Because sugar is a fungible commodity, competition in the United States sugar industry is primarily based upon price, customer service and reliability as a supplier.

Government Programs and Regulations

Food, Conservation and Energy Act of 2008

The Food, Conservation and Energy Act of 2008 (the Farm Bill) enacted in May, 2008, contains several provisions related to the domestic sugar industry aimed at achieving balance and stability in the U.S. sugar market while minimizing the cost to the Federal government.  The Farm Bill applies to the 2008 through 2012 crop years.  Generally, the Farm Bill:

·                  maintains a non-recourse loan program,

·                  sets a minimum overall allotment quantity for U.S. producers at no less than 85% of domestic consumption,

·                  maintains a system of marketing allocations for sugarbeet and sugar cane producers,

·                  restricts imports of foreign sugar and

·                  provides a new market balancing mechanism to divert any oversupply of sugar from sugar producers to ethanol producers.

Under the Farm Bill, sugar processors can borrow funds on a non-recourse basis from the Commodity Credit Corporation (CCC), with repayment of such funds secured by sugar.  If the price of sugar drops below the forfeiture price, the processors can forfeit the sugar securing the loans to the CCC in lieu of repayment.  Processors may also obtain CCC loans for “in-process” sugar or syrups at 80 percent of the loan rate.

The Farm Bill incorporates gradual loan rate increases for raw and refined sugar.  For raw sugar, the loan rate will increase three-quarters of a cent per pound, raw value, phased-in in quarter-cent increments over crop years 2009-2011.  Raw cane loan rates will remain at 18.00 cents/lb in 2008 then rise gradually to 18.75 cents by 2011, and they will remain at 18.75 cents/lb for the 2012 crop year.  Refined beet sugar loan rates are set at 22.90 cents/lb for the 2008 crop and thereafter are set at a rate equal to 128.5 percent of the loan rate per pound for raw cane sugar for each of the 2009 through 2012 crop years.

The United States Department of Agriculture (USDA) has historically maintained raw and refined sugar prices above the forfeiture price without cost to the U.S. Treasury by regulating the supply of sugar in the U.S. market through management of a tariff rate quota system.  Currently, forty exporting countries retain guaranteed preferential access to the U.S. market under World Trade Organization (WTO) and Free Trade Agreement (FTA) rules.  Mexico’s access has been unlimited since January 1, 2008.  The Farm Bill sets a minimum overall allotment quantity for U.S. producers at no less than 85% of domestic consumption and provides a market balancing mechanism if there is an oversupply in the domestic sugar market.  If the Secretary of Agriculture determines there is an oversupply of sugar, the new market balancing mechanism requires the Secretary to divert the excess sugar from sugar producers to ethanol producers while minimizing the cost to the U.S Treasury.  Although the market balancing mechanism will provide sustainability to the sugar industry in the short term, there is no assurance that the sugar-to-ethanol program will be in place after the Farm Bill expires.

The marketing allotments and allocations set forth under the Farm Bill affect the sugar produced from the 2008 crop through the 2012 crop.  On an annual basis, the marketing allotments and the corresponding allocation to the Company will dictate the amount of sugar the Company can sell into the

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domestic market.  The Company’s marketing allocation for the 2008 crop was set at approximately 35 million hundredweight.  The Company’s marketing allocation for the 2009 crop is also currently set at approximately 35 million hundredweight.  The Company’s allocation may reduce or increase the amount of sugar the Company can market for a given year, thus affecting the number of acres of sugarbeets required for processing to produce that amount of sugar.

North American Free Trade Agreement

The North American Free Trade Agreement (NAFTA) governs sweetener trade between the United States and Mexico.  Under the NAFTA, tariffs on over-quota imports of sugar from and exports of sugar to Mexico expired on January 1, 2008.  Imports of Mexican sugar could cause material harm to the United States sugar market.  During the year ended September 30, 2008, Mexico exported approximately 13 million hundredweight of sugar into the United States.  During the year ended September 30, 2009, Mexico exported approximately 26 million hundredweight of sugar into the United States.  The Company has no way to predict the extent to which Mexico will take advantage of its export opportunities.

Regional and Bilateral Free Trade Agreements

The United States government may continue to pursue international trade agreements.  The Company monitors the U.S. government’s international trade policy because it may lead to additional commitments to import sugar into the U.S. market.  Some of the countries who have either participated in trade agreements or are contemplated for new negotiations are major producers of sugar.  The primary agreements affecting sugar that are completed or are being negotiated, to the Company’s knowledge, include the Colombian Free Trade Agreement, Panama Free Trade Agreement, the Trans-Pacific Free Trade Agreement, the Association of Southeast Asian Nations, South Africa, Thailand, and others.  The Company believes these agreements, if they reach fruition, could negatively impact the Company’s profitability.  If increases in guaranteed access or reductions in sugar tariffs are included in these agreements, excess sugar from these regions could enter the U.S. market and reduce domestic sugar prices.

The Peru Free Trade Agreement has been ratified by the U.S. Congress and it became effective on February 1, 2009.  Sugar trade with Peru is subject to a net surplus producer requirement.  Peru, typically a net importer, is unlikely to meet that requirement most years.  Negotiations have been completed on the U.S.-Colombian Free Trade Agreement and the U.S.-Panama Free Trade Agreement but they have not been ratified by the U.S. Congress.  The Company does not know when these trade agreements will be brought before Congress for a vote.

The Doha Round negotiations of the WTO may be pursued by the U.S. Administration and some of its international counterparts.  It is unclear at this time whether negotiations will be completed.  If the negotiations are completed, the outcome of any negotiated arrangement could have significant adverse consequences for the Company.

The U.S. sugar industry and the Company, as an influential member of such industry, recognize the potential negative impact that could result if these agreements are entered into by the United States and are taking steps to attempt to positively influence the outcome.  The Company and the sugar industry intend to continue to focus significant attention on trade issues in the future.

The impact of the various trade agreements on the Company cannot be assessed at this time due to the uncertainty concerning the terms of the agreements and whether they will ultimately be

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implemented.  It is possible, however, that the passage of various trade agreements could have a material adverse effect on the Company through a reduction in sugar selling prices, and a corresponding reduction in the beet payment to its shareholders.

Employees

As of October 1, 2009, the Company had 1,369 full-time employees, of which 1,108 were hourly and 261 were salaried.  The Company had 14 part-time employees.  In addition, the Company employs approximately 813 hourly seasonal workers, approximately 370 during the sugarbeet harvest and approximately 443 during the remainder of the sugarbeet processing campaign.  During the sugarbeet harvest, the Company also contracts with third party agencies for approximately another 1,300 additional workers.

Substantially all of the hourly employees at the Company’s factories, including full-time and seasonal employees, are represented by the Bakery, Confectionery, Tobacco Workers and Grain Millers (BCTGM) AFL-CIO, and are covered by collective bargaining agreements expiring July 31, 2011 for the Red River Valley factory employees and April 30, 2012 for the Sidney, Montana, factory employees.  Office, clerical and management employees are not unionized, except for certain office employees at the Moorhead and Crookston, Minnesota, and Hillsboro, North Dakota, factories who are covered by the collective bargaining agreement with the BCTGM.  The Company considers its employee relations to be good.

Environmental Matters

The Company is subject to extensive federal and state environmental laws and regulations with respect to water and air quality, solid waste disposal and odor and noise control.  The Company conducts an ongoing compliance program designed to meet these environmental laws and regulations.  The Company believes that it is in substantial compliance with applicable environmental laws and regulations.  From time to time, however, the Company may be involved in investigations or determinations regarding matters that may arise in the normal course of business.  The Company works closely with all affected government agencies to resolve environmental issues that arise and believes they will be resolved without any adverse effect on the Company.

The Company’s sugar manufacturing process is energy intensive and generates carbon dioxide and other “Greenhouse Gases” (GHGs).  Several bills have been introduced in the United States Senate and House of Representatives that would regulate GHGs and carbon dioxide emissions to reduce the impact of global climate change.  The Company believes it is likely that industries generating GHGs, including the Company, will be subject to either federal or state regulation relating to climate change policies in the relatively near future.  These policies, if adopted, will increase the Company’s energy and other operating costs.  Depending on how these policies address imports, the domestic sugar market may have a competitive disadvantage with imported sugar.  These policies could have a significant negative impact on the Company’s beet payment to shareholders if we are not able to pass the increased costs on to the Company’s customers.  On June 26, 2009, the United States House of Representatives passed H.R. 2454, the American Clean Energy and Security Act.  This bill creates a system for regulating emissions of GHG’s and also creates a market for emission allowances or credits. It is uncertain whether the steps necessary to move this bill or similar bills through the legislative process will be completed this year.

On November 25, 2008, the Company entered into a stipulation agreement with the Minnesota Pollution Control Agency (MPCA) related to hydrogen sulfide emissions from its Crookston, East Grand Forks and Moorhead, Minnesota factories.  As part of the stipulation agreement, the Company has agreed to make certain capital expenditures over the next three years and implement specified

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changes in operating procedures to contain hydrogen sulfide emissions at those factories.  The required capital expenditures are currently estimated to be approximately $12 million.

Including the expenditures related to the MPCA stipulation agreement, the Company has identified capital expenditures for environmental related projects over the next three years at the Company’s factory locations of approximately $15.8 million.

Available Information

The Company’s corporate headquarters are located at 101 North Third Street, Moorhead, Minnesota 56560, telephone number (218) 236-4400.  The Company’s fiscal year ends August 31.  The Company’s website is www.crystalsugar.com.  The Company files annual, quarterly and periodic reports with the United States Securities and Exchange Commission (SEC).  These reports can be accessed by selecting “Links” on the Company’s website or electronic or paper copies can be obtained free of charge upon request.  In addition, the Company’s reports may be read or copied at the SEC Public Reference Room at 100 F. Street, N.E., Washington, D.C. 20549.  The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  The SEC maintains an Internet site at http://www.sec.gov that contains reports and other information filed electronically about the Company.

Item 1A.          RISK FACTORS

The risks described below together with all of the other information included in this Annual Report on Form 10-K should be considered carefully.  The risks and uncertainties described below and elsewhere in this Annual Report on Form 10-K are not the only ones we face.  If any of the following risks actually occur, our business, financial condition or results of operations would likely suffer.  In that case, the beet payments made to our members may decrease, the value of our Preferred Stock could fall, and a member could lose all or part of their investment.

If we do not continue to minimize our operating expenses, we may not be able to compete effectively in our industry.

Our Company operates in a commodity market environment.  Our strategy involves, to a substantial degree, maximizing profitability by continuing to control operating expenses. In furtherance of this strategy, we have engaged in ongoing, company-wide efficiency activities intended to increase productivity and reduce costs.  These activities have included realigning and streamlining our operations and optimizing the efficiency of our production facilities.  We cannot assure that our efforts will result in our continued or increased profitability.

While we believe that we currently have adequate internal control procedures in place, we are still exposed to potential risks from recent legislation requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002.

As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission adopted rules requiring us to include a report of management on our internal control over financial reporting in our annual reports on Form 10-K that contains an assessment by management of the effectiveness of our internal control over financial reporting.  In addition, the independent registered public accounting firm auditing our financial statements will be required, as of August 31, 2010, to attest to and report on management’s assessment of the effectiveness of our internal control over financial reporting.  Management has conducted a rigorous review of our internal control over financial reporting

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in order to assure compliance with the Section 404 requirements.  However, if our independent auditors interpret the Section 404 requirements and the related rules and regulations differently from us or if our independent auditors are not satisfied with our internal control over financial reporting or with the level at which it is documented, operated or reviewed, they may, when required, decline to attest to management’s assessment or issue a qualified report.

An oversupply of sugar could reduce the price of sugar and our profitability.

The domestic sugar market is reactive to any oversupply of refined sugar.  Many factors can lead to an oversupply of sugar.  Excess supply may result in a decline in domestic sugar prices.  Lower sugar prices directly impact profitability of selling refined sugar in the United States.  If the selling price of sugar decreases, our revenues will decrease which will result in a direct negative impact on our profitability.

Under the current terms of the NAFTA and other government regulations, imports of sugar from Mexico may enter the U.S. market.  These imports could oversupply the U.S. market and reduce the price of sugar.

The United States government has been engaged in regional and bilateral trade negotiations with countries that produce sugar.  If the United States government enters into bilateral trade agreements with sugar producing countries, the amount of sugar in the domestic sugar market could increase.  An increase in the supply of sugar could reduce the price of sugar, which would reduce our profitability.

The success or failure of our business is linked to certain government programs, regulations and legislation that may change in the future.

The nature and scope of future legislation and regulation affecting the sugar market and industry cannot be predicted.  The current price supports and market protections for sugar in place may not continue in their present forms.  If the price support programs were eliminated in their entirety, or if certain protections the federal government provides from foreign competitors were materially reduced, the amount of sugar we can sell, the amount of sugarbeets we can process and the price for which we can sell our sugar may be impacted, which could reduce the profitability of our business.  If legislation or government programs change, we may not be able to adopt strategies that would allow us to compete effectively in a greatly changed domestic market for sugar and the adverse effects could negatively impact the desirability of growing sugarbeets for delivery to us for processing, our financial results, and our continued viability.

If we are unable to compete in the sweetener market, our operating results may suffer.

Sugar is a fungible commodity with competition for sales volume based primarily upon customer service, price and reliability, though differences in proximity to various geographic markets within the United States result in differences in freight and shipping costs which in turn generally affect pricing and competitiveness.  The overall sweetener market, in addition to sugar, includes corn-based sweeteners, such as regular and high fructose corn syrups, and non-nutritive, high-intensity sweeteners such as aspartame.  Differences in functional properties and prices have tended to define the use of these various sweeteners.  Although the various sweeteners are not interchangeable in all applications, the substitution of other sweeteners for sugar has occurred in certain products, such as soft drinks.  We cannot predict the availability, development or potential use of these and other alternative sweeteners and their possible impact on us or our members.  We believe that we possess the ability to compete successfully with other producers of sugar in the United States.  In spite of this competitive advantage, substitute products could reduce the demand for sugar which could lower the price of sugar, resulting in reduced profitability in the future.

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Our Board of Directors authorized the planting of Roundup Ready® sugarbeets beginning with the 2008 crop.  Sugar and agri-products produced from Roundup Ready® sugarbeets have received regulatory approval in most of the countries in which we have direct or indirect sales of our products.  While the sale of sugar and agri-products from Roundup Ready® sugarbeet seed has been approved in most markets, marketing risks still exist.  United Sugars Corporation and Midwest Agri-Commodities, our sugar and agri-product marketing agents, respectively, feel they can successfully sell and distribute products from Roundup Ready® sugarbeets with minimal affect on our revenue.  However, customers’ views on the use of products from biotechnology derived crops such as Roundup Ready® sugarbeets may change over time which could negatively impact our profitability.

Our operations are sensitive to energy prices.

The prices we pay for energy related products, such as natural gas, coal and coke, have been volatile and may continue to be volatile.  We use substantial amounts of these products in our manufacturing process.  We believe that the prices for energy related products including natural gas, coal, coke and diesel fuel will continue to be volatile and higher than historical levels.  Higher energy prices may also increase the costs of many goods and services we acquire.  These higher prices may materially increase our cost of production, thus reducing our profitability.

Quantity and quality of sugarbeets is sensitive to weather and other factors such as seed varieties.

The sugarbeet, as with most other crops, is affected by many factors, including seed varieties and weather conditions during the growing season.  Additionally, the quantity of sugarbeets to be processed and weather conditions during the processing season affect our ability to store sugarbeets held for processing.  Growing and storage conditions different from what we predict or expect may change the quantity and quality of sugarbeets available for processing and therefore may affect the quantity of the sugar we produce.

A significant decrease in the quantity or quality of sugarbeets harvested due to poor weather conditions would result in higher unit operating costs and lower earnings.

A significant increase in the quantity or quality of sugarbeets harvested due to good weather conditions or improved seed varieties could result in an unpredictably large quantity of sugarbeets to be processed.  If we are required to process a larger than anticipated quantity of sugarbeets we may experience increased per unit of sugar processing cost which in turn would have an adverse financial consequence to us and our members.

In order to manage the quantity and quality of sugarbeets that are harvested or available for processing, our Grower Contract allows for a reduction in the number of acres to be planted at the beginning of a crop year or harvested at the end of a crop year.

Adequate storage conditions during a processing campaign are critical to ensure that the quantity and quality of sugarbeets available for processing are maintained.  If we are not able to obtain or maintain adequate storage conditions, the sugarbeets stored for processing at a later date may deteriorate, resulting in increased production costs, and decreased production which in turn would have an adverse financial consequence to us and our members.

Based on results of recent yield trials and crop results, we expect that new sugarbeet varieties may continue to result in increases in the average sugarbeet crop yields over the next five years.  As a result, we anticipate that there may continue to be a need to reduce the number of acres of sugarbeets

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that can be planted by each shareholder in order to match the sugarbeet crop volume to our processing and marketing capacity.  This reduction, if necessary, would be accomplished by reducing the per share planting tolerance by an amount that may be material.  Assuming there are no changes in other variables, the increased yield per acre expected to result from the continued use of the new sugarbeet varieties would allow shareholders to deliver substantially the same number of tons of sugarbeets to us from fewer acres.  Individual shareholder profitability will continue to depend on the circumstances unique to each shareholder.

On January 24, 2008, the Center for Food Safety along with other groups filed a lawsuit against the USDA regarding the decision to deregulate Roundup Ready® sugarbeets, specifically whether a full environmental impact study should have been completed.  On September 21, 2009 the U.S. District Court (Court) ruled against the USDA finding that the USDA violated federal law by failing to prepare an Environmental Impact Statement before deregulating Roundup Ready® sugarbeets.  The Court has determined that the USDA now needs to prepare a full Environmental Impact Statement.  The actual direct impact of the decision on sugarbeet producers and us will become more defined during the “remedy phase” of the case, which will occur over the next several months.  The Center for Food Safety has not asked the Court to prohibit planting of Roundup Ready® sugarbeets.  However, if the Court restricts planting in 2010, conventional varieties would need to be utilized which would have a negative impact on our crop yields.  Chemical manufacturers have significantly reduced planned production of conventional herbicides due to the rapid increase in planting of Roundup Ready® sugarbeets.  Weed control for conventional varieties could be difficult if there is an inadequate supply of conventional herbicides.  While we are taking precautionary measures, the risk of Roundup Ready® sugarbeet restrictions still exists and the negative financial impact to us and our members could be significant.

If we are unable to manage the quantity and quality of sugarbeets available for processing, we could experience adverse financial consequences that would impact both us and our members.

Increased profitability of alternative crops could adversely affect the desirability of growing sugarbeets.

The prices growers receive from crops other than sugarbeets could impact their decisions as to which crop to plant and how much to plant.  Higher prices and increased profitability for alternative crops could negatively impact the desirability of growing sugarbeets for delivery to us for processing, our financial results, and our continued viability.

Federal, state and local environmental laws and regulations may impact our operations.

We are subject to extensive federal and state environmental laws and regulations with respect to water and air quality and solid waste disposal.  We conduct on-going programs designed to meet these environmental laws and regulations.  Changes in environmental laws or regulations or complying with existing environmental laws and regulations or enforcement action brought under such environmental laws and regulations might increase the cost of operating our facilities or result in significant capital investment.  Any such changes or compliance costs could reduce our profitability.

Our sugar manufacturing process is energy intensive and generates carbon dioxide and other “Greenhouse Gases” (GHGs).  Several bills have been introduced in the United States Senate and House of Representatives that would regulate GHGs and carbon dioxide emissions to reduce the impact of global climate change.  We believe it is likely that industries generating GHGs, including us, will be subject to either federal or state regulation under climate change policies in the relatively near future.  These policies, if adopted, will increase our energy and other operating costs.  Depending on how these

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policies address imports, the domestic sugar market may have a competitive disadvantage with imported sugar.  These policies could have a significant negative impact on the beet payment to our shareholders if we are not able to pass the increased costs on to our customers.

Item 2.                                        PROPERTY AND PROCESSING FACILITIES

The Company operates five sugarbeet processing factories in the Red River Valley and one in Sidney, Montana.  The Company owns all of its factories and the land on which they are located.  The factories range in size from 150,000 to 400,000 square feet.  These properties are used in the Company’s sugar segment.

The location and processing capacity of the Company’s factories are:

Each of the processing factories includes the physical facilities and equipment necessary to process sugarbeets into sugar.  Each factory has space for sugarbeet storage, including ventilated storage sites.  The Red River Valley factories also have cold storage facilities.  Each of the Red River Valley factories is currently operating at or near its capacity.  The Sidney, Montana factory is currently operating at less than full capacity.  The Company owns molasses desugarization (MDS) plants at its East Grand Forks and Hillsboro facilities.  The MDS plants process molasses to extract additional sugar.  The Company has sugar packaging facilities located at the Moorhead, Hillsboro, Crookston, East Grand Forks and Sidney factories.

The Company also owns a sugarbeet processing plant in Torrington, Wyoming.  The Torrington, Wyoming, facility is leased on a long-term basis to another sugar company.

ProGold owns a corn wet-milling plant in Wahpeton, North Dakota, which is currently being leased to Cargill.  The corn wet-milling plant is capable of processing corn to produce corn sweeteners (including high fructose corn syrups) and various agri-products.  This property is used in the Company’s leasing segment.  On November 6, 2007, ProGold entered into an amended lease agreement with Cargill that superseded and replaced the previous 10 year lease between ProGold and Cargill and provides that (1) Cargill will pay ProGold average annual rental payments equal to $21,900,000, and (2) that the term of the lease be extended until December 31, 2017.

The Company’s corporate office is located in a 30,000 square foot, two-story office building in Moorhead, Minnesota.  The Company also has a 100,000 square foot Technical Services Center situated on approximately 200 acres in Moorhead, Minnesota.  The Company owns both facilities.  The Company also owns numerous sites as sugarbeet receiving and storage stations located within proximity of their factories.  Substantially all non-current assets are mortgaged or pledged as collateral for its indebtedness to various financial institutions.

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Item 3.                                        LEGAL PROCEEDINGS

From time to time and in the ordinary course of its business, the Company is named as a defendant in legal proceedings related to various issues, including worker’s compensation claims, tort claims and contractual disputes.  The Company is currently involved in certain legal proceedings which have arisen in the ordinary course of the Company’s business.  The Company is also aware of certain other potential claims which could result in the commencement of legal proceedings.  The Company carries insurance which provides protection against certain types of claims.  With respect to current litigation and potential claims of which the Company is aware, the Company’s management believes that (i) the Company has insurance protection to cover all or a portion of any judgments which may be rendered against the Company with respect to certain claims or actions and (ii) any judgments which may be entered against the Company and which may exceed such insurance coverage or which may arise in actions involving potential liabilities not covered by insurance policies are not likely to have a material adverse effect upon the Company, or its assets or operations.

On February 11, 2009, the Ninth Circuit Court of Appeals (the Court) issued its decision in the case of Amalgamated Sugar Co, LLC v. Thomas Vilsack; Department of Agriculture, a case that involved Amalgamated Sugar’s challenge of a decision by the USDA to transfer certain sugar marketing allocations to the Company.  The Court reversed the lower court’s decision which confirmed the USDA’s transfer of the marketing allocations, and remanded the case back to the lower court for further action.  On May 19, 2009, the USDA announced, subject to further proceedings, that it was redistributing a portion of the Company’s sugar marketing allocations to other sugar beet processors in response to legal proceedings contesting the transfer of certain sugar marketing allocations to the Company.  To protect the Company’s interests in the marketing allocations, the Company appealed the Court’s decision to the U.S. Supreme Court.  The U.S. Supreme Court has since denied hearing the case, essentially putting an end to the case.  As a result, the Company will experience a net reduction of marketing allocations of approximately 1 million CWT.  The Company does not believe that the loss of these marketing allocations will have a material impact on the Company’s planted acres going forward, assuming average crop yield, crop quality and continued domestic consumption trends.

Item 4.                                        SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the Company’s shareholders during the quarter ended August 31, 2009.

PART II

Item 5.                                        MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

As of August 31, 2009, the Company had 2,812 shares of the Common Stock and 498,570 shares of the Preferred Stock issued and outstanding.  There is no established public market for the Company’s Common Stock or Preferred Stock, as such shares may be held only by farmer-producers who are eligible for membership in the Company.  The Company’s shares are not listed for trading on any exchange or quotation system.  Although transfers of the Company’s shares may occur only with the consent of the Board of the Directors, the Company does not obtain information regarding the transfer price in connection with such transfers.  As a result, the Company is not able to provide information regarding the prices at which the Company’s shares have been transferred.

Because the number of acres of sugarbeets a member may grow for sale to the Company is directly related to the number of shares of Preferred Stock owned, a limited, private market for Preferred Stock exists.  It is not anticipated that a general public market for the Company’s shares of Common

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Stock or Preferred Stock will develop due to the limitations on transfer and the various membership requirements which must be satisfied in order to acquire such shares.

A member desiring to sell his or her Common Stock or Preferred Stock must first offer them to the Company for purchase at par value.  If the Company declines to purchase such shares, either class may be sold to a new member (i.e., another farm operator not already a member) and Preferred Stock may be sold to one or more existing members or farm operators approved for membership, in each case subject to approval by the Board of Directors.  To date, the Company’s Board of Directors has not exercised the Company’s right of first refusal to purchase preferred shares offered for sale by its members.  Because the Company does not require parties seeking approval for transfers to provide information regarding the transfer price, the Company does not possess verifiable information regarding the transfer price involved in recent transfers of the Company’s Preferred Stock.

Item 6.                                        SELECTED FINANCIAL DATA

The selected financial data of the Company should be read in conjunction with the consolidated financial statements and related notes included in Appendix A of this report.

(1) Net Proceeds are the Company’s gross revenues, less the costs and expenses of producing and marketing sugar, agri-products and sugarbeet seed, but before payments to members for sugarbeets.  (For a more complete description of the calculation of the payment to members for sugarbeets, see “Item 1.  Business – Raw Materials.”)

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(2) Calculated by dividing the Company’s long term debt, exclusive of the current maturities of such debt, by members’ investments.

(3) Information for a fiscal year relates to the crop planted and harvested in the preceding calendar year (i.e., information for the fiscal year ended August 31, 2009 relates to the crop of 2008).  Crop data reflect the combined data of the Red River Valley crop and the Sidney crop.

Item 7.             MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the financial conditions and results of operations of the Company should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in Appendix A of this report.

Liquidity and Capital Resources

Under the Company’s Bylaws and Member Grower Contracts, payments for member-delivered sugarbeets, the principal raw material used in producing the sugar and agri-products it sells, are subordinated to all member business expenses.  In addition, the beet payments made to member growers and non-member growers are paid in three payments over the course of a year, and the member payments are made net of any anticipated unit retain for the crop.  These procedures have the effect of providing the Company with an additional source of short-term financing.

Because sugar is sold throughout the year (while sugarbeets are processed primarily in the fall, winter and spring) and because substantial amounts of equipment are required for its operations, the Company has utilized substantial outside financing on both a seasonal and long-term basis to fund its operations.  The majority of such financing has been provided by a consortium of lenders led by CoBank, ACB.

During the current national economic downturn and financial market instability, the Company, due to its strong financial position and relationships with its lenders, has continued to secure the necessary financing for its working capital requirements and capital expenditures.

The Company has a seasonal line of credit through July 30, 2012, with a consortium of lenders led by CoBank, ACB of $320.0 million, against which there was no outstanding balance as of August 31, 2009 and a line of credit with Wells Fargo Bank for $1.0 million, against which there was no outstanding balance as of August 31, 2009.  The Company’s commercial paper program provides short-term borrowings of up to $320 million of which approximately $46.0 million was outstanding as of August 31, 2009.  The Company had $2.7 million of short-term letters of credit outstanding as of August 31, 2009.  Any borrowings under the commercial paper program along with outstanding short-term letters of credit will act to reduce the available credit under the CoBank, ACB seasonal line of credit by a commensurate amount.  The unused short-term line of credit as of August 31, 2009, was $272.3 million.

The Company also has long-term debt availability through December 31, 2011, with CoBank, ACB of $174.6 million, of which $40.3 million in loans and $70.8 million in long-term letters of credit were outstanding as of August 31, 2009.  The unused long-term line of credit as of August 31, 2009, was $63.5 million.  In addition, the Company had long-term debt outstanding, as of August 31, 2009, of $50 million from a private placement of Senior Notes that occurred in September of 1998; $1.4 million from a private placement of Senior Notes that occurred in January of 2003; and $70.1 million from five separate issuances of Pollution Control and Industrial Development Revenue Bonds.

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The Company had outstanding purchase commitments totaling $5.7 million as of August 31, 2009, for equipment and construction contracts related to various capital projects.

As of August 31, 2009, Midwest had outstanding short-term debt with CoBank, ACB of $5.5 million, of which $3.2 million was guaranteed by the Company.

The net cash provided by operations was $72.1 million for the year ended August 31, 2009, as compared to $94.3 million for the year ended August 31, 2008.  This decrease in the cash provided of $22.2 million was primarily the result of the following:

·                  Reflected in the change in the net cash provided by operating activities is a net decrease of $1.2 million from the prior year which was the result of decreased revenue of $32.6 million partially offset by lower costs and expenses of $10.0 million, a reduction in the member gross beet payment of $13.6 million and an increase in unit retains withheld of $7.8 million primarily resulting from a $3.00 per ton unit retain for the 2008 crop versus a $2.00 per ton unit retain in the previous year.  These changes were primarily due to the reduction in the tons of sugarbeets harvested and products produced partially offset by increased product selling prices.

·                  The increase in cash used related to the changes in amount due growers was $11.4 million. Although the total payment due to members for sugarbeets, net of unit retains was lower in 2009, 83 percent of the total payment was issued to the growers during 2009 as compared to 78 percent of the total payment being issued to the growers during 2008.  This is due to differences between the forecasted payments due to members for sugarbeets, net of unit retains, upon which the interim payments are based, and the actual payment as determined at the end of the fiscal year.

·                  The decrease in cash provided related to the changes in accounts receivable of $11.1 million was due to increased collections in 2008 on a larger beginning of the year receivable balance resulting from increased sales volume in 2007.

·                  The decrease in cash provided related to the changes in inventories of $21.2 million is due to no beginning inventory of unprocessed sugarbeets in 2009, a 14 percent increase in the per hundredweight net realizable value of sugar inventory as of August 31, 2009 as compared to August 31, 2008, a 172 percent increase in the tons of pulp inventory as of August 31, 2009 as compared to August 31, 2008 and a 68 percent increase in the per ton net realizable value of pulp inventory as of August 31, 2009 as compared to August 31, 2008, offset by a 26 percent decrease in the hundredweight of sugar inventory as of August 31, 2009 as compared to August 31, 2008.

·                  The above decreases were partially offset by increases in cash provided or decreases in cash used related to changes in advances to related parties of $8.3 million due primarily to the timing of the cash requirements of our marketing agents, other liabilities of $14.6 million due to a higher beginning balance in 2008 resulting from deferred net proceeds due to an early campaign start-up in August 2007.

The net cash used in investing activities was $49.8 million for the year ended August 31, 2009, as compared to $44.8 million for the year ended August 31, 2008.  The increase of $5.0 million was primarily due to a change in other assets of $4.0 million and an equity distribution from CoBank LLC in 2008 of $1.8 million partially offset by decreased purchases of property and equipment of $ .9 million.

The net cash used for financing activities was $22.3 million for the year ended August 31, 2009, as compared to $49.5 million for the year ended August 31, 2008.  This decrease of $27.2 million was primarily due to increased net proceeds from short-term debt of $40.4 million, increased proceeds from long term debt of $74.3 million, partially offset by increased payments on long term debt of $80.8

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million, increased distributions to minority interest of $2.2 million and increased payments of unit retains of $4.5 million.

The Company anticipates that the funds necessary for working capital requirements and future capital expenditures will be derived from operations and unit retains along with short-term and long-term borrowings.

The following table provides information regarding the Company’s contractual obligations as of August 31, 2009:

(1) Accrued Employee benefits of $1.9 million with corresponding offsetting assets and requiring no future payments have been excluded from the amounts presented.  Other Long-Term Liabilities of $2.9 million, which relate to deferred revenue also requiring no future payments, have also been excluded from the table.

(2) The Company expects to make contributions of approximately $4.3 million to the defined benefit pension plans during the next fiscal year.  Contributions for future years are not known at this time and therefore are not included in the above table.  The Company expects to make contributions in the next fiscal year of approximately $99,000 related to Supplemental Executive Retirement Plans.  This amount is reflected in Other Long-Term Obligations in the above table.

Critical Accounting Policies and Estimates

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

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

Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the accounting estimates are made, and (2) other materially different estimates could have been reasonably made or material changes in the estimates are reasonably likely to occur from period to period.  The Company’s critical accounting estimates include the following:

Inventory Valuation

Sugar, pulp, molasses and other agri-product inventories are valued at estimated net realizable value.  The Company derives its estimates from sales contracts, recent sales and evaluations of market

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conditions and trends.  Changes in market conditions may cause management’s estimates to differ from actual results.

Property and Equipment, Property and Equipment Held for Lease, and Depreciation

Property and equipment, and property and equipment held for lease are depreciated for financial reporting purposes principally using straight-line methods with estimated useful lives ranging from 3 to 40 years.  Economic circumstances or other factors may cause management’s estimates of expected useful lives to differ from actual.

The Company reviews its property and equipment, and property and equipment held for lease for impairment whenever events indicate that the carrying amount of the asset may not be recoverable.  An impairment loss is recorded when the sum of the future cash flows is less than the carrying amount of the asset.  An impairment loss is measured as the amount by which the carrying amount of the asset exceeds its fair value.  Considerable management judgment is necessary to estimate future cash flows and may differ from actual results.

Intangible Assets and Amortization

Intangible assets are amortized for financial reporting purposes principally using straight-line methods based on the expected useful lives of the assets.  Economic circumstances or other factors may cause management’s estimates of expected useful lives to differ from actual.

Pension Plan and Other Post-Retirement Benefits

Accumulated plan benefits are those future periodic payments, including lump-sum distributions, which are attributable under the Company’s Pension Plan and Post-Retirement Plan to the service employees have rendered. Accumulated plan benefits include benefits expected to be paid to retired or vested terminated employees or their beneficiaries; beneficiaries of employees who have died; and present employees or their beneficiaries.

The actuarial present value of accumulated plan benefits is determined by an actuary and is the amount that results from applying actuarial assumptions to adjust the accumulated plan benefits to reflect the time value of money and the probability of payment.

The significant actuarial assumptions used in the determination of the actuarial present value of accumulated pension plan benefits for fiscal 2009 were as follows: Valuation Funding Method - Entry age normal, frozen initial liability; Life Expectancy – RP-2000 Mortality Table; Retirement Age – graded rates from 1 percent retiring at age 55 to 100 percent retired by age 70 ;  Investment Return - 8.00 percent compounded annually for funding;  Discount Rate- 6.55 percent compounded annually;  Salary Scale - 3.5 percent compounded annually (Plan A only).

The significant actuarial assumptions used in the determination of the actuarial present value of accumulated post-retirement benefits for fiscal 2009 were as follows: Healthcare Cost Trend - a 10.0 percent annual rate of increase in the per capita cost of covered healthcare benefits for participants under age 65 was assumed for 2009.  The rate is assumed to decline to 7.0 percent over the next five years.  For participants age 65 and older, an 11.0 percent annual rate of increase in the per capita cost of covered healthcare benefits was assumed for 2009.  The rate is assumed to decline to 8.0 percent over the next five years; Discount Rate- 6.55 percent compounded annually.

Actual events may differ from the assumptions used and may result in plan benefit payments differing significantly from these current estimates.

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Self-Insurance

The Company is self-insured for a portion of the risks related to workers’ compensation claims and employees’ health insurance.  The estimate of self-insurance liability is based upon known claims and an estimate of incurred but not reported (IBNR) claims.  IBNR claims are estimated using historical claims lag information received by a third party claims administrator.  Actual events may differ from the assumptions used and may result in claim payments differing from the current estimates.

Results of Operations

The Company’s operational results and the resulting beet payment to its members are substantially dependent on market factors, including domestic prices for refined sugar.  These factors are continuously influenced by a wide variety of market forces, including domestic sugarbeet and cane production, weather conditions and United States’ farm and trade policy, which the Company is unable to predict.

In addition, highly variable weather conditions during the growing, harvesting and processing seasons, as well as diseases and insects, may materially affect the quality and quantity of sugarbeets available for purchase as well as the unit costs of raw materials and processing.

Comparison of the Years Ended August 31, 2009 and 2008

The harvest of the Red River Valley and Sidney sugarbeet crops grown during 2008 and processed during fiscal 2009 produced a total of 10.7 million tons of sugarbeets, or approximately 25.4 tons of sugarbeets per acre from approximately 422,000 acres.  This represents a decrease in total tons harvested of approximately 14.1 percent compared to the 2007 crop.  The sugar content of the 2008 crop was 17.6 percent as compared to the 18.1 percent sugar content of the 2007 crop.  The Company produced a total of approximately 30.7 million hundredweight of sugar from the 2008 crop, a decrease of approximately 16.2 percent compared to the 2007 crop.

Revenue for the year ended August 31, 2009 was $1.2 billion, a decrease of $32.6 million from the year ended August 31, 2008.  The table below reflects the percentage changes in product revenues, prices and volumes for the year ended August 31, 2009, as compared to the year ended August 31, 2008.

The increases in selling prices for our products reflect strong markets due to supply and demand factors. The decrease in the volume of sugar sold reflects the impact of less product availability due to a 16.2 percent decline in sugar produced this year as compared to last year. The decreases in the volumes of pulp and molasses sold were due in part to lower product availability resulting from an 11.5 percent decrease in pulp produced and a 65.8 percent decrease in molasses produced this year as compared to last year. Lower beginning inventory levels for both pulp and molasses this year as compared to prior year also contributed to the reduction in the availability of these products for sale.

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Cost of sales for the year ended August 31, 2009, exclusive of payments to members for sugarbeets, increased $2.8 million as compared to the year ended August 31, 2008.  This increase was primarily related to the following:

·                  The change in the net realizable value of the product inventories from the beginning of the reporting period is recorded on the balance sheet as either an increase or decrease to inventories with a corresponding dollar for dollar adjustment to cost of sales on the statement of operations.  The decrease in the net realizable value of product inventories for the year ended August 31, 2009 was $13.0 million as compared to a decrease of $5.8 million for the year ended August 31, 2008 resulting in a $7.2 million unfavorable change in the cost of sales between the two years as shown in the table below:

Change in the Net Realizable Value of Product Inventories

(1) The change is primarily due to lower quantities of products as of August 31, 2008 as compared to August 31, 2007.

(2) The change is primarily due to a 26 percent decrease in the hundredweight of sugar inventory as of August 31, 2009 as compared to August 31, 2008 partially offset by a 14 percent increase in the per hundredweight net realizable value of sugar inventory as of August 31, 2009 as compared to August 31, 2008, a 172 percent increase in the tons of pulp inventory as of August 31, 2009 as compared to August 31, 2008 and a 68 percent increase in the per ton net realizable value of pulp inventory as of August 31, 2009 as compared to August 31, 2008.

·                  Factory operating costs increased $9.2 million for the year ended August 31, 2009, as compared to the year ended August 31, 2008 primarily due to higher costs associated with coke, chemicals, operating supplies, property taxes and maintenance costs. These costs were partially offset by lower natural gas costs.

·                  An impairment loss of $11.9 million related to the property and equipment at the Sidney, Montana facility was recognized in 2008 and included in cost of sales. There was no impairment loss in 2009.

·                  The cost recognized associated with the non-member sugarbeets decreased $18.8 million for the year ended August 31, 2009, when compared to last year.  This decrease was primarily due to a 56.6 percent decrease in tons purchased.

·                  Due to lower than anticipated sugar production and inventory levels during the first quarter of this year, the Company’s sugar marketing agent, United Sugars Corporation, purchased and sold additional sugar to meet our customers’ needs.  As a result, the costs associated with purchased sugar increased $14.2 million for the year ended August 31, 2009, as compared to the year ended August 31, 2008.

·                  The cost of beet seed sold increased $4.0 million for the year ended August 31, 2009, as compared to the year ended August 31, 2008. This increase was due to higher seed processing costs along with a 93.8 percent increase in the volume of beet seed sold.

Selling, general and administrative expenses decreased $23.4 million for the year ended August 31, 2009, as compared to the year ended August 31, 2008.  Selling expenses decreased $24.5 million primarily due to the decrease in the volumes of products sold and decreased transportation rates

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resulting in decreased shipping and handling expenses.  General and administrative expenses increased $ 1.1 million due to general cost increases.

Interest expense decreased $4.7 million for the year ended August 31, 2009, as compared to the year ended August 31, 2008.  This reflects a decrease in the average borrowing levels and lower average interest rates for both short-term and long-term debt.

Other income, net increased $4.1 million for the year ended August 31, 2009, as compared to the year ended August 31, 2008.  This was due primarily to the receipt of $4.8 million in November 2008 related to a legal settlement.

Non-member business activities resulted in a gain of $2.3 million for the year ended August 31, 2009, as compared to a loss of $4.8 million for the year ended August, 2008.  The change was primarily related to the impairment loss recognized in 2008 for Sidney Sugars Incorporated.

Payments to members for sugarbeets together with unit retains declared, decreased by $13.6 million from $547.4 million in 2008 to $533.8 million in 2009.  This decrease was primarily due to fewer tons harvested and a lower sugar content of the sugarbeets partially offset by increased product selling prices.

Comparison of the Years Ended August 31, 2008 and 2007

Due to the large size of the 2007 Red River Valley crop, the Company, for the second consecutive year, commenced the harvest and processing of the crop in August as compared to a typical start-up in September.  All the costs incurred prior to the beginning of the Company’s 2008 fiscal year that related to receiving and processing the 2007 sugarbeet crop were deferred in fiscal 2007 and recognized in fiscal 2008.  Similarly, the net realizable values of products produced prior to the beginning of the Company’s 2008 fiscal year that related to the 2007 sugarbeet crop were deferred in fiscal 2007 and recognized in fiscal 2008.

The harvest of the Red River Valley and Sidney sugarbeet crops grown during 2007 and processed during fiscal 2008 produced a total of 12.5 million tons of sugarbeets, or approximately 23.6 tons of sugarbeets per acre from approximately 529,000 acres.  This represents a decrease in total tons harvested of approximately 3.0 percent compared to the 2006 crop.  The sugar content of the 2007 crop is 18.1 percent as compared to the 18.2 percent sugar content of the 2006 crop.  The Company produced a total of approximately 36.6 million hundredweight of sugar from the 2007 crop, a decrease of approximately 1.6 percent compared to the 2006 crop.  As of August 31, 2008, the Company had approximately 192,000 hundredweight of sugar produced from the 2007 crop that exceeded the marketing allocation limit for the time period of October 1, 2007 to September 30, 2008.

Revenue for the year ended August 31, 2008 was $1.2 billion, an increase of $10.0 million from the year ended August 31, 2007.  The table below reflects the percentage changes in product revenues, prices and volumes for the year ended August 31, 2008, as compared to the year ended August 31, 2007.

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The substantial increase in the revenue and volume of betaine sold was primarily due to increased availability of saleable product resulting from a higher beginning inventory level as of September 1, 2007 as compared to the inventory level as of September 1, 2006.

Cost of sales for the year ended August 31, 2008, exclusive of payments to members for sugarbeets, increased $54.7 million as compared to the year ended August 31, 2007.  This increase was primarily related to the following:

·                  The change in the net realizable value of the product inventories from the beginning of the reporting period is recorded on the balance sheet as either an increase or decrease to inventories with a corresponding dollar for dollar adjustment to cost of sales on the statement of operations.  The decrease in the net realizable value of product inventories for the year ended August 31, 2008 was $5.8 million as compared to an increase of $40.4 million for the year ended August 31, 2007 resulting in a $46.2 million unfavorable change in the cost of sales between the two years as shown in the table below:

Change in the Net Realizable Value of Product Inventories

(1) The change was primarily due to a 47 percent increase in the hundredweight of sugar inventory as of August 31, 2007 as compared to August 31, 2006 partially offset by a 10 percent decrease in the per hundredweight net realizable value of sugar inventory as of August 31, 2007 as compared to August 31, 2006.

(2) The change was primarily due to lower quantities of products as of August 31, 2008 as compared to August 31, 2007.

·                  An impairment loss of $11.9 million related to the property and equipment at the Sidney, Montana facility was recognized in 2008 and included in cost of sales.

·                  The cost recognized associated with the non-member sugarbeets decreased $4.4 million for the year ended August 31, 2008, when compared to the same period last year.  This decrease was primarily due to an 11.7 percent decrease in tons purchased.

Selling, general and administrative expenses increased $20.8 million for the year ended August 31, 2008, as compared to the year ended August 31, 2007.  Selling expenses increased $22.6 million primarily due to the increase in the volumes of products sold and increased transportation rates resulting in increased shipping and handling expenses.  General and administrative expenses decreased $ 1.8 million due to general cost decreases.

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Interest expense decreased $5.5 million for the year ended August 31, 2008, as compared to the year ended August 31, 2007.  This reflects a decrease in the average borrowing levels and lower average interest rates for both short-term and long-term debt.

Non-member business activities resulted in a loss of $4.8 million for the year ended August 31, 2008, as compared to a gain of $2.3 million for the year ended August, 2007.  The decrease was primarily related to the impairment loss for Sidney Sugars Incorporated partially offset by increased income from the activities of ProGold.

Payments to members for sugarbeets together with unit retains declared, decreased by $51.7 million from $599.1 million in 2007 to $547.4 million in 2008.  This decrease was primarily due to lower sugar selling prices and fewer tons harvested partially offset by increased agri-product selling prices.

2009 Crop and Estimated Fiscal Year 2010 Information

This discussion contains the Company’s current estimate of the results to be obtained from the Company’s processing of the 2009 sugarbeet crop.  This discussion includes forward-looking statements regarding the quantity of sugar to be produced from the 2009 sugarbeet crop.  These forward-looking statements are based largely upon the Company’s expectations and estimates of future events; as a result, they are subject to a variety of risks and uncertainties.  The actual results experienced by the Company could differ materially from the forward-looking statements contained herein.

The harvest of the Red River Valley and the Sidney sugarbeet crops grown during 2009 is estimated to produce a total of 10.4 million tons of sugarbeets, or approximately 22.1 tons of sugarbeets per acre from approximately 469,000 acres.  This represents a decrease in total tons harvested of approximately 3.0 percent compared to the 2008 crop.  The sugar content of the 2009 crop is estimated to be 16.7 percent as compared to the 17.6 percent sugar content of the 2008 crop.  The Company expects to produce a total of approximately 28.3 million hundredweight of sugar from the 2009 crop, a decrease of approximately 7.8 percent compared to the 2008 crop.

Item 7A.                               QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss to future earnings, to fair values or to future cash flows that may result from changes in the price of a financial instrument.  The value of a financial instrument may change as a result of changes in the interest rates, exchange rates, commodity prices, equity prices and other market changes.  Market risk is attributed to all market-risk sensitive financial instruments, including long term debt.

The Company does not believe that it is subject to any material market risk exposure with respect to interest rates, exchange rates, commodity prices, equity prices and other market changes that would require disclosure under this item.

Item 8.                                        FINANCIAL STATEMENTS

The consolidated financial statements of the Company for the fiscal years ended August 31, 2009, 2008 and 2007 have been audited by Eide Bailly LLP, an independent registered public accounting firm.  Such consolidated financial statements have been included herein in reliance upon the report of Eide Bailly LLP.  The consolidated financial statements of the Company are included in Appendix A to this annual report.

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Item 9.             CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

Item 9A(T).             CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s chief executive officer and chief financial officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 240.13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934) as of August 31, 2009.  Based on that review and evaluation, which included inquiries made to certain other employees of the Company, the chief executive officer and chief financial officer have concluded that the Company’s current disclosure controls and procedures, as designed and implemented, are effective in ensuring that information relating to the Company required to be disclosed in the reports the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Security and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to the Company’s management, including the chief executive officer and the chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended.  Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, because of changes in conditions, the effectiveness of internal control may vary over time.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of August 31, 2009, using criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework and concluded that the Company maintained effective internal control over financial reporting as of August 31, 2009 based on these criteria.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

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Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that may have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART III

Item 10.                                 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Board of Directors

The Board of Directors of the Company consists of three directors from each of the five Red River Valley factory districts.  Directors must hold common stock of the Company or must be representatives of such shareholders belonging to the district they represent and are elected by the members of that district.  In the case of a holder of common stock who is other than a natural person, a duly appointed or elected representative of such shareholder may serve as a director.  Any holder of common stock can stand for election or be nominated from the floor at the factory district meeting where elections are held.  The directors were elected to serve three-year terms expiring in December of the years indicated in the table below.  One director is elected each year from each Red River Valley factory district.  A director cannot serve more than four consecutive three-year terms.

The table below lists certain information concerning current directors of the Company.

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Below is the biographical information on each Director.

Francis L. Kritzberger.  Mr. Kritzberger has been a director since 1996 and has served as Chairman since 2008.  Mr. Kritzberger has previously served as a director with the Company, from July 30, 1989 until July 30, 1993.  Mr. Kritzberger has been a farmer since 1964.  Mr. Kritzberger serves on the Board of Directors of United Sugars Corporation, the Board of Directors of Midwest Agri-Commodities Company, the Board of Governors of ProGold Limited Liability Company and is also on the Board of Directors of the North Dakota Council of Cooperatives.

Neil C. Widner.  Mr. Widner has been a director since 2000 and has served as Vice-Chairman since 2007.  Mr. Widner has farmed near Stephen, Minnesota, since 1973.  Mr. Widner serves on the Board of Directors of United Sugars Corporation, the Board of Governors of ProGold Limited Liability Company and as a director for the American Sugarbeet Growers Association.

Donald S. Andringa. Mr. Andringa was elected as a director in 2008. Mr. Andringa has been a sugarbeet farmer for 35 years with his farming operations near Crookston, Minnesota.  Mr. Andringa currently serves on the Board of Directors of the Red River Valley Farmers Insurance Pool and the

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Advisory Board for the University of Minnesota-Crookston Northwest Research and Outreach Center. Mr. Andringa previously served on Board of Directors of the Crookston Factory District Grower Association, the Red River Valley Sugarbeet Growers Association’s Executive Committee and the American Sugarbeet Growers Association Board of Directors.

William Baldwin.  Mr. Baldwin has been a director since 2004.  Mr. Baldwin has been farming in the Drayton Factory District since 1966 and is the President of Baldwin Farms Incorporated.  Mr. Baldwin is the past President of the Red River Valley Sugarbeet Growers Association, served on the American Sugarbeet Growers Executive Committee and is currently serving on the Farm Service Agency, State Committee.

Richard Borgen.  Mr. Borgen has been a director since 1997.  Mr. Borgen has farmed east of Perley, Minnesota, since 1967 and has served as a director on the Perley Co-op Elevator Board and the Norman County West school board.

John Brainard.  Mr. Brainard has been a director since 2005.  Mr. Brainard has been a sugarbeet grower since 1998.  Mr. Brainard currently serves as a director of the American Sugarbeet Growers Association. Mr. Brainard is a past director of the Minnesota Farm Bureau and has served on the executive committee of the Red River Valley Sugarbeet Growers Association.

Brian R. Erickson.  Mr. Erickson has been a director since 2005.  Mr. Erickson has been a sugarbeet grower for over 20 years.  Mr. Erickson currently serves on the Board of Directors of Midwest Agri-Commodities Company. Mr. Erickson has served as a director and Chairman of the East Grand Forks Economic Development and Housing Authority.

Robert M. Green.  Mr. Green has been a director since 2005.  Mr. Green has been a sugarbeet grower since 1976.  Mr. Green also serves as a director for the American Sugarbeet Growers Association.  Mr. Green served 12 years as a director of the Red River Valley Sugarbeet Growers Association.

John F. Gudajtes.  Mr. Gudajtes has been a director since 2003.  Mr. Gudajtes has farmed in the Minto, North Dakota area since 1967 and is the President of Gudajtes Farms.  Mr. Gudajtes is a past President of the Walsh County Historical Society.

Curtis E. Haugen.  Mr. Haugen has been a director since 2001.  Mr. Haugen has been a farmer since 1981 and farms near Argyle, Minnesota.  Mr. Haugen serves on the Board of Directors of United Sugars Corporation, as a director for the American Sugarbeet Growers Association and as a director and President of the Farmer’s Union Oil Company, Oslo, Minnesota.

William A. Hejl.  Mr. Hejl has been a director since 2007.  Mr. Hejl has farmed near Amenia, North Dakota since 1987.  Mr. Hejl currently serves as a director of the American Sugarbeet Growers Association and is a manager of the Rush River Water Resource District.  Mr. Hejl also served as President of the Red River Valley Sugarbeet Growers Association and as President of the World Association of Beet and Cane Growers.

Curtis Knutson.  Mr. Knutson has been a director since 2007.  Mr. Knutson has farmed near Fisher, Minnesota for 36 years.  Mr. Knutson currently serves on the Polk County Extension Board.

Dale Kuehl. Mr. Kuehl was elected as a director in 2008.  Mr. Kuehl has been a sugarbeet farmer for 33 years with his farming operations near Glyndon, Minnesota.  Mr. Kuehl currently serves on the Board of Governors of ProGold Limited Liability Company.  Mr. Kuehl previously served on the Boards of Directors of the Moorhead Factory District Grower Association, the Red River Valley Sugarbeet Growers Association, the American Sugarbeet Growers Association, the International Sugarbeet Institute and the Red River Valley Coop Power Association.

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Jeff D. McInnes.  Mr. McInnes has been a director since 2001.  Mr. McInnes co-manages a 4,000 acre farming operation near Hillsboro, North Dakota.  Mr. McInnes is the founder and manager of the Basement Traders Marketing Club, a grain marketing association in Hillsboro.  Mr. McInnes serves on the Board of Governors of ProGold Limited Liability Company.

Steve Williams.  Mr. Williams has been a director since 2006.  Mr. Williams has farmed near Fisher, Minnesota since 1987.  Mr. Williams serves on the Board of Directors of the American Sugarbeet Growers Association and served as its President from 2006 to 2008.  Mr. Williams is also a director of the Sugar Association and the Halstad Cooperative Telephone Company.  Mr. Williams served as a director of the Red River Valley Sugarbeet Growers Association from 1998 to 2007, and served as its Chairman from 2003 to 2007.

Audit Committee and Audit Committee Financial Expert

The Audit Committee assists the Board of Directors in fulfilling its oversight responsibilities relating to the Company’s financial reporting and controls, the annual independent audit of the Company’s consolidated financial statements and the legal compliance and ethics programs as established by management and the Board of Directors.  The Audit Committee selects the independent public accountants, approves the fees and the scope and procedural plans of the audits of the Company’s consolidated financial statements.  The Audit Committee administers the Company’s employee complaint program and handles, on behalf of the full Board of Directors, any issues that arise under the Company’s Code of Ethics.  The Audit Committee has a charter that is available from the Company upon request.

As of August 31, 2009, the Board of Directors of the Company has determined that there is no audit committee financial expert serving on the Audit Committee.  The Company is a cooperative formed in accordance with the Minnesota cooperative law of the State of Minnesota.  In accordance with the Minnesota cooperative law, the Amended and Restated Articles of Incorporation of the Company and the Amended and Restated Bylaws of the Company, the Board of Directors must be composed of members of the Company (the holders of common stock).  Membership in the Company is limited to agricultural producers who are actively involved in the production of sugarbeets.  Based on the state law requirements for both membership and board service, the Company is unable to recruit outside of its membership to elect to its Board of Directors and its audit committee an individual that possesses the attributes of an “audit committee financial expert” as defined by the SEC.  To date, the Company has been unable to recruit from its membership an individual to serve on the Board of Directors that possesses the attributes of an “audit committee financial expert.”

The Audit Committee has reviewed and discussed with management and Eide Bailly LLP our audited consolidated financials statements contained in our Annual Report on Form 10-K for the fiscal year ended August 31, 2009. The Audit Committee also discussed with Eide Bailly LLP the matters required to be discussed pursuant to SAS No. 61 (Codification of Statements of Auditing Standards, AU Section 380), which includes, among other items, matters related to the conduct of the audit of the Company’s consolidated financial statements.

The Audit Committee has received and reviewed the written disclosures and the letter from Eide Bailly LLP required by the applicable requirements of the Public Company Accounting Oversight Board regarding Eide Bailly LLP’s communications with the Audit Committee concerning its independence from the Company and has discussed with Eide Bailly LLP its independence from the Company.

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Based on the review and discussions referred to above, the Audit Committee recommended to the Board that the audited financial statements be included in our Annual Report on Form 10-K for our fiscal year ended August 31, 2009 for filing with the Commission.

On August 31, 2009, the members of the Audit Committee were John Brainard (Committee Chair), Brian R. Erickson, Robert M. Green, William A. Hejl, Dale Kuehl and Donald S. Andringa.

Company Officers

The table below lists the officers of the Company for the fiscal year covered by this report, none of whom owns any shares of Common Stock or Preferred Stock.  Officers are elected annually by the Board of Directors.

David A. Berg.  Mr. Berg was named the Company’s President in March 2007 and assumed the role as the Company’s Chief Executive Officer in October 2007.  Mr. Berg served as the Company’s Vice President-Operations and Chief Operations Officer from January 2004 to March 2007.  Mr. Berg was the Company’s Vice President-Agriculture during the period December 2000 to January 2004 and the Company’s Vice President-Administration during the period from October 1998 to December 2000.  Mr. Berg currently serves on the Boards of Directors of United Sugars Corporation, Midwest Agri-Commodities Company and Sidney Sugars Incorporated.

Thomas S. Astrup.  Mr. Astrup was named the Company’s Vice President-Finance and Chief Financial Officer in May 2007.  Mr. Astrup was named the Chief Operating Officer and Chief Financial Officer of Sidney Sugars Incorporated in May 2007.  Mr. Astrup served as the Company’s Vice President-Agriculture from 2004 to 2007.  Mr. Astrup was the Company’s Vice President-Administration from 2000 to 2004 and the Company’s Corporate Controller, Assistant Treasurer and Assistant Secretary from 1999 to 2000.  Mr. Astrup currently serves on the Board of Directors for Sidney Sugars Incorporated and on the ProGold Limited Liability Company Board of Governors.

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Joseph J. Talley.  Mr. Talley was named the Company’s Chief Operating Officer in May 2007.  Mr. Talley was named as the Chairman of the Board and Chief Executive Officer of Sidney Sugars Incorporated in May 2007.  Mr. Talley served as the Company’s Vice President-Finance and Chief Financial Officer of the Company from 2003 to 2007.  Mr. Talley was the Company’s Vice President-Finance from 1998 to 2003.  Mr. Talley also served as Chief Operating Officer of Sidney Sugars Incorporated from 2002 to 2007.  He currently serves on the Board of Governors for ProGold Limited Liability Company.

Brian F. Ingulsrud.  Mr. Ingulsrud was named the Company’s Vice President-Administration in February 2004.  From 2000 to 2004, he served as the Company’s Corporate Controller, Assistant Secretary and Assistant Treasurer.

Teresa A. Warne.  Ms. Warne was named the Company’s Corporate Controller, Chief Accounting Officer, Assistant Treasurer and Assistant Secretary in March 2008.  Prior to joining the Company, Ms. Warne was the Director of Accounting with Caribou Coffee Company at its corporate headquarters in Brooklyn Center Minnesota from 2006 to 2008.  Ms. Warne previously was employed with Northwest Airlines where she held various financial positions from 1999 to 2006.

Daniel C. Mott.  Mr. Mott became the Company’s Secretary in 1999.  Previously, he had served as Assistant Secretary since 1995.  Mr. Mott also serves as the Company’s General Counsel.  He is a Shareholder in the law firm of Fredrikson & Byron, P.A.  Mr. Mott is not an employee of the Company.

Samuel S. M. Wai.  Mr. Wai was named the Company’s Treasurer and Assistant Secretary in 1999.  Mr. Wai also serves as Treasurer of the American Crystal Sugar Political Action Committee and on the Board of Directors of the Institute of Cooperative Financial Officers.

Mark L. Lembke.  Mr. Lembke was named the Company’s Assistant Secretary and Assistant Treasurer in 1996 and also currently serves as the Company’s Finance Administration Manager.

Ronald K. Peterson.  Mr. Peterson was named the Company’s Assistant Secretary and Assistant Treasurer in 1993 and also currently serves as the Company’s Accounting and Systems Manager.

David L. Malmskog.  Mr. Malmskog was named the Company’s Assistant Secretary and Assistant Treasurer in 1998 and also currently serves as the Company’s Director-Economic Analysis.

Lisa M. Maloy. Ms. Maloy was named the Company’s Assistant Secretary in 2002 and also currently serves as the Company’s Treasury Operations Manager.

Code of Ethics

The Company has adopted a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller as well as all employees and Directors of the Company.  The Company will provide at no charge a copy of the code of ethics to any person who requests a copy by sending a written request to the Company’s headquarters, attention of the Chief Executive Officer of the Company.

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Item 11.         EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Overview

This compensation discussion and analysis addresses the compensation paid to the individuals who served as our President and Chief Executive Officer, Chief Financial Officer, Chief Operating Officer and Vice President of Administration for fiscal year 2009, all of whom are identified on the Summary Compensation Table immediately following this report (Named Executive Officers).  Immediately following this compensation discussion and analysis is the Compensation Committee Report of the Board of Directors (the Committee Report).  Members of the Compensation Committee were in their role for fiscal year 2009.

Purpose and Philosophy

We believe that strong leadership is a key component of success.  To be successful, we must be able to attract, retain and motivate leaders with the skills necessary to excel in an integrated cooperative environment and understand key business and technical matters related to the diverse business influences that result from growers and owners, marketing partnerships and activities, technical manufacturing processes, and government policy.  Our goal is to provide a competitive compensation package to our Named Executive Officers combining total direct compensation, retirement income and other benefits.

Total direct compensation, which includes base salary, short-term cash incentive compensation and long-term incentive compensation, is measured against comparable companies in the market in which we compete.

We believe the market in which we compete for executive talent consists of companies with similar characteristics to the Company, for example, manufacturing companies with similar revenues in similar geographies.  We further believe that the market also includes privately owned businesses in general and exclusively as it relates to long-term incentive compensation because of the structure and nature of our business.  Therefore, we have compared our compensation versus compensation data points for these types of companies (our market).

Our management, on behalf of the Compensation Committee and Board of Directors, retained Towers Perrin, an outside compensation consultant (Compensation Consultant), to prepare market-based compensation data comparing compensation information for our Named Executive Officers with that of executive officers in our market. This analysis uses market data from published national survey sources, including Towers Perrin and Watson Wyatt.  In addition, pay data from the proxy materials from a group of comparative companies is referenced.  This group of companies, together with the survey sources, represents the market in which we believe we compete for executive talent and includes:

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·                  Actuant Corporation

·                  Ameron International Corp.

·                  Arctic Cat Inc.

·                  Barnes Group Inc.

·                  Brady Corporation

·                  Constar International Inc.

·                  Donaldson Company, Inc.

·                  Gardner Denver, Inc.

·                  Graco Inc.

·                  Herman Miller, Inc.

·                  IDEX Corporation

·                  Imperial Sugar Company

·                  Magellan Midstream Partners, L.P.

·                  Milacron Inc.

·                  Mine Safety Appliances Co

·                  Minn-Dak Farmers Cooperative

·                  MSC Industrial Direct Co.

·                  OMNOVA Solutions Inc.

·                  Packaging Corporation of America

·                  Rayonier Inc.

·                  Schweitzer-Mauduit International, Inc.

·                  The Toro Company

·                  Thomas & Betts Corporation

This data was provided to the Compensation Committee in September, 2008, and was utilized to establish market based pay practices for each of the Named Executive Officer positions.

Our base salary midpoint for our President and Chief Executive Officer is projected to represent less than the median of the market and total direct compensation is projected to be near the lower quartile of the market.  Currently, we generally target our other Named Executive Officers’ base salary midpoint near the median of the market and total direct compensation near the lower quartile of our market.  The Compensation Committee determined that total direct compensation as established was appropriate and reflects the compensation principles outlined in this report.

While market based information is important in terms of setting pay practices, it is not the only factor considered when making individual executive compensation decisions. Other factors considered when making individual executive compensation decisions include individual roles and responsibilities, performance, reporting structure and internal pay relationships.

Process

The Compensation Committee of the Board of Directors is responsible for annually reviewing and recommending to the Board of Directors the base salary and performance objectives for the incentive compensation (both short-term and long-term) of the President and Chief Executive Officer, as well as the performance objectives for long-term incentive compensation for all Named Executive Officers.  Board action on recommendations is taken by a vote of all of the directors, none of whom are members of management.  Decisions on executive compensation made by the Compensation Committee, the Board or the President and Chief Executive Officer have been guided by our compensation philosophy discussed above.

Our President and Chief Executive Officer sets base salary and the annual performance objectives for the short-term incentive compensation for the other Named Executive Officers.  The prospective base salary and annual performance objectives for the other Named Executive Officers are reviewed with the Board of Directors prior to being finalized by the President and Chief Executive Officer.

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Elements of Compensation

The elements of compensation paid to our Named Executive Officers for 2009 are as follows:

·                  Base salary

·                  Short-term cash incentive compensation

·                  Long-term incentive compensation

·                  Retirement and other benefits

·                  Perquisites

·                  Severance for our President and Chief Executive Officer

Each of the above are more completely described below.

Base Salary

The objective of the level of base salary paid to our Named Executive Officers is to reflect individual roles and responsibilities, performance, reporting structure, and internal pay relationships with respect to market competitiveness.  All established base salaries for fiscal year 2009 for our Named Executive Officers were in accordance with our compensation philosophy described earlier in this report.

The fiscal year 2009 base salary of our President and Chief Executive Officer, Mr. Berg, was set by the Board of Directors in September, 2008 based on the comparable market data provided by our Compensation Consultant.

Short-Term Cash Incentive Compensation

Our short-term cash incentive compensation is designed to reward the Named Executive Officers for their individual performance and our financial performance for the most recently completed fiscal year.  Short-term cash incentive compensation is paid in cash following the close of the fiscal year.

Short-term cash incentive compensation provides an annual cash incentive opportunity, expressed as a percent of base salary, for our Named Executive Officers who meet performance objectives.  For fiscal year 2009, our President and Chief Executive Officer had an opportunity to receive an additional 45% of his base salary, and the other Named Executive Officers had an opportunity to receive an additional 35% of their base salary, by meeting “target” performance levels.  Actual awards are determined based on the different performance levels achieved by the Named Executive Officers.  The potential for short-term cash incentive compensation ranges from 0% for unsatisfactory performance to a maximum of 90% for outstanding performance for the Chief Executive Officer.  For our other Named Executive Officers, the potential for short-term cash incentive compensation ranges from 0% for unsatisfactory performance to a maximum of 70% for outstanding performance.

The President and Chief Executive Officer’s performance objectives were weighted with 50% of the potential award based on our overall financial performance and 50% of the potential award based on

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the President and Chief Executive Officer’s individual performance objectives as established by the Board of Directors.  For the other Named Executive Officers, annual performance objectives were determined by the President and Chief Executive Officer at the beginning of fiscal year 2009, with 40% based on our overall financial performance and 60% based on the achievement of individual performance objectives, including personal effectiveness.  Our overall financial performance objectives are based on the final gross beet payment for the fiscal year and total on-farm profit.  Total on-farm profit is equal to total gross beet payment minus the product of Total Harvested Acres multiplied by On-Farm Costs per Acre.  On-Farm Cost per Acre is based on the Red River Valley Report from the Minnesota and North Dakota Farm Business Management Education Program. For fiscal year 2009, the final gross beet payment was below target and the total on-farm profit was at the outstanding performance level.

The individual performance objectives of our Named Executive Officers are derived primarily from our strategic initiatives, which are comprised of ten general strategies:

·                  Trade and policy leadership

·                  Cost and revenue management

·                  Agricultural gold standards

·                  Beet storage excellence

·                  Balanced and maximized slice and recovery

·                  Maintenance excellence

·                  Product quality

·                  Safety

·                  Training

·                  Technology and automation

Each Named Executive Officer, based on his area of responsibility, is tasked with objectives based on our strategies.  As indicated above, Mr. Berg’s performance objectives for fiscal year 2009 were set by the Board of Directors.  The performance objectives for fiscal year 2009 for our other Named Executive Officers were set by Mr. Berg at the beginning of fiscal year 2009.

The Board of Directors rates the President and Chief Executive Officer at the end of the fiscal year with respect to his achievement of his performance objectives, and his short-term cash incentive compensation for fiscal year 2009 is based on this rating.  The President and Chief Executive Officer rates the other Named Executive Officers with respect to their individual achievement of their performance objectives and each of them receives a short-term cash incentive compensation award based on that rating.

Long-Term Incentive Compensation

Long-term incentive compensation provides an incentive opportunity, expressed as a percent of base salary, for our Named Executive Officers as a group who meet performance objectives.  For fiscal year 2009, our President and Chief Executive Officer had an opportunity to receive an additional 40% of his base salary and the other Named Executive Officers had an opportunity to receive an additional 20% of their base salary assuming target performance levels.  Actual awards are determined based on the performance level achieved by the Named Executive Officers as a group.  The potential for long-term

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incentive compensation ranges from 0% for unsatisfactory performance to a maximum of 80% for outstanding performance for the President and Chief Executive Officer.  For our other Named Executive Officers, the potential for long-term incentive compensation ranges from 0% for unsatisfactory performance to a maximum of 40% for outstanding performance.  Unlike our short-term cash incentive compensation, long-term incentive compensation awards are based on the performance level of our Named Executive Officers as a group.  Forty-five percent (45%) of the performance objectives were based on the fiscal year’s actual on-farm profit as compared to historical profit levels while the other 55% was based on an assessment made by the Board of Directors regarding achievement of specific long-term performance objectives as established by the Board of Directors. For fiscal year 2009, the total on-farm profit was at the outstanding performance level.

Our 2005 Long-Term Incentive Plan (2005 Plan) sets forth long-term incentive compensation available to our Named Executive Officers.  Our 2005 Plan is designed to provide financial incentive awards through deferred compensation to reward the Named Executive Officers for long-term strategic performance and to encourage long-term commitment to our organization.  Originally, our long-term incentive compensation was set forth in our 1999 Long-Term Incentive Plan (1999 Plan) which has been replaced by our 2005 Plan.  Even though the 2005 Plan replaced the 1999 Plan, vested awards under the 1999 Plan are still governed by the 1999 Plan.  The 1999 Plan and the 2005 Plan are substantially similar.

Under the 2005 Plan, a long-term incentive award may be granted to a Named Executive Officer in the form of contract rights, cash, or in a combination of both cash and contract rights (incentive awards).  The value of any contract rights granted is determined by our Board of Directors.  To date, all incentive awards granted have been in the form of contract rights.  Incentive awards vest over a three-year period, with the first vesting occurring one year after the grant.  Vested incentive awards may be redeemed at the discretion of the Named Executive Officer and must be redeemed upon certain other events causing a termination of employment.  Redemptions are in the form of cash payments that may be deferred by the Named Executive Officer.  Named Executive Officers receive a profit per acre payment for vested contract rights based on the average profit per acre paid to our shareholders.  Profit per acre payments are made to the Named Executive Officers in the same manner as our shareholders receive their crop payments.  Profit per acre payments can be taken in cash or deferred until a later date.  The Board of Directors retains the discretion to determine the amount of any incentive awards to be made available to the Named Executive Officers with respect to a given fiscal year.

On September 23, 2009, 282.10 contract rights were granted to Named Executive Officers with respect to performance for the fiscal year ended August 31, 2009 at a value of $2,200 per contract right.  Correspondingly, the redemption value of the contract rights previously granted to the Named Executive Officers under the 1999 and 2005 Plans were increased from $1,750 to $2,200 per contract right.  Effective as of August 31, 2009, there were a total of 1,296.24 contract rights issued and outstanding to the Named Executive Officers under the 1999 and 2005 Plans, of which 716.09 were vested.

Retirement and other benefits

Retirement benefits are an important tool in achieving overall compensation objectives because they provide a financial security component and promote retention.  Our Named Executive Officers participate in our retirement plans like any other employee.  In addition, we provide a Supplemental Executive Retirement Plan (SERP) for our Named Executive Officers, which is a non-qualified defined contribution and defined benefit plan designed to replace benefits executives would have received if not for limits imposed by Code Section 401(a)(17) and 402(g).  The Named Executive Officers may elect to defer a portion of base salary by regular payroll deductions, and may also defer 100% of all short-term

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incentive compensation and long-term incentive compensation awards or payments related to any such awards.  All long term incentive deferrals are held in a long term incentive plan trust, all other deferrals are held in a SERP trust.  Both have seven investment options and are subject to the claims of our creditors.  The pension component of the SERP is “unfunded” with all amounts to be paid from our general assets, to the extent available, when due.

Our Named Executive Officers participate in our fully insured long-term disability program for all nonunion employees to provide income protection in the event of permanent disability.  The long-term disability plan is part of the core benefits we provide.  The long-term disability plan provides a benefit equal to 60% of base pay with a maximum monthly benefit of $10,000.  The Named Executive Officers pay tax on the value of the long-term disability premium, and as a result if they become disabled their benefit will not be taxable.  Other nonunion employees are not taxed on the value of their long-term disability premium; therefore if they become disabled their benefit will be taxable.  For the Named Executive Officers, we impute the value of the premium to provide a tax-free benefit to partially offset the impact of receiving a disability benefit less than 60% of base pay because of the $10,000 monthly benefit limitation.

Perquisites

Our Compensation Committee and the Board of Directors believe perquisites should be modest, reasonable in terms of cost, aligned with business needs and comparative to other salaried employees.  Named Executive Officers may receive some or all of the following perquisites while employed: car allowance, cell phone, minimum of 4 weeks annual vacation accrual, reimbursement for income tax preparation and executive physicals.  Additionally, the President and Chief Executive Officer is provided with a country club membership.   The above described perquisites cease upon retirement or separation of service with us.

Severance

If we terminate Mr. Berg without cause he is entitled to receive a post-termination severance payment equal to two years of his base salary in effect on the date of termination.  There are no compensatory plans or arrangements providing for payments to any of the other Named Executive Officers in conjunction with any termination of employment with us, including without limitation resignation, severance, retirement or constructive termination of employment by the Company.  Furthermore, there are no such plans or arrangements providing for payments to any of the Named Executive Officers in conjunction with a change of control or change in such Named Executive Officer’s responsibilities.

Employment Agreements

We entered into an employment agreement with Mr. Berg effective March 21, 2007.  The agreement provides that Mr. Berg shall serve as an “at will” employee at the pleasure of the Board of Directors.  The agreement also includes a two-year non-compete/non-solicitation agreement with Mr. Berg.  Mr. Berg received a gross base salary for serving as President with this base salary increasing at the time Mr. Berg assumed the position of President and Chief Executive Officer.  Thereafter, the agreement grants the Board of Directors the authority to establish Mr. Berg’s base salary each year, and also provides that he may participate in other benefit plans offered to all employees.

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Compensation Committee Report

The Compensation Committee of the Company’s Board of Directors has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Form 10-K.

Members of the Compensation Committee, all of whom are members of the Board of Directors:

Jeff D. McInnes, Chairman

John Brainard

Brian R. Erickson

John F. Gudajtes

Curtis E. Haugen

Steve Williams

Summary Compensation Table

The following table summarizes the compensation of the Named Executive Officers for the fiscal years ended August 31, 2009, 2008 and 2007.  The Named Executive Officers are the Company’s Chief Executive Officer, Chief Financial Officer and the two other most highly compensated executive officers of the Company.

2009 SUMMARY COMPENSATION TABLE

(1)   Mr. Berg was named President in March 2007 and assumed the role as the Company’s Chief Executive officer in October 2007.

(2)   Amounts shown are not reduced to reflect the Named Executive Officers’ elections, if any, to defer compensation into the Supplemental Executive Retirement Plan (SERP).

(3)   Represents the stated value of contract rights that were earned in the fiscal year, which was the year performance targets were achieved. Contract rights vest equally over a three year period.  For further information regarding the Long-Term Incentive Plan, see “Compensation Discussion and Analysis” within this Form 10-K.

(4)   Represents the change in value of the outstanding contract rights granted to the executives in prior years.  Contract rights vest equally over a three year period.  For further information regarding the Long-Term Incentive Plan, see “Compensation Discussion and Analysis” within this Form 10-K.

(5)   Represents the Profit-Per-Acre payments that were earned in the fiscal year, which was the year performance targets were achieved.

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(6)   Components of Change in Pension Value and NQDC Earnings. See table below for details:

Change in Pension Value and Nonqualified Deferred Compensation Earnings

(A) Represents the change in the present value of the accumulated benefits provided by the plan or agreement.

(B)  Interest is considered to be preferential if the rate paid to the executive exceeds 120% of the applicable long-term federal rate under the Interal Revenue Code.  Amounts reported reflect only the interest that exceeds 120% of the applicable long-term federal rate.

(7)   Includes the imputed value of Company provided life insurance and long-term disability insurance, car allowance, reimbursement of health club dues, costs of tax return preparation, costs of medical physicals, Company 401(k) matching contributions, Company matching SERP contributions, flexible spending taxable cash and flexible spending dollars into 401(k).

Grants of Plan-Based Awards

The following table discloses the grants of plan-based awards to each of the Company’s Named Executive Officers for the current year related to the 2005 Long-Term Incentive Plan (LTIP).  The amounts of these awards that were expensed are shown in the Summary Compensation Table.  The table below also discloses the estimated future payouts related to contract rights under the 2005 LTIP, Short-Term Incentive Plan (STIP) and the Profit-Per-Acre (PPA) payment under the 2005 LTIP.

Grants of Plan-Based Awards Table