LAND O LAKES INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
(Mark One)

[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 2002
or

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _______________ to
________________.

Commission file number 333-84486

LAND O'LAKES, INC.
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(Exact Name of Registrant as Specified in Its Charter)

Minnesota 41-0365145
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

4001 Lexington Avenue North
Arden Hills, Minnesota 55112
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(Address of Principal Executive Offices) (Zip Code)

(651) 481-2222
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(Registrant's Telephone Number, Including Area Code)

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 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 [ ]

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. Not applicable.

Land O'Lakes, Inc. is a cooperative. Our voting and non-voting common
equity can only be held by our members. No public market for voting and
non-voting common equity of Land O'Lakes, Inc. is established and it is
unlikely, in the foreseeable future, that a public market for our voting
and non-voting common equity will develop.

Documents incorporated by reference: None.

Indicate by check mark whether the registrant is an accelerated filer
(as defined in rule 12-b-2 of the Act). Yes [ ] No [X]

The number of shares of the registrant's common stock outstanding as of
December 31, 2002: 1,127 shares of Class A common stock, 5,207 shares of
Class B common stock, 194 shares of Class C common stock, and 1,105 shares
of Class D common stock.

INDEX

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FORWARD-LOOKING STATEMENTS

The information presented in this Annual Report on Form 10-K under the
headings "Item 1. Business" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation" contains forward-looking
statements. The forward-looking statements are based on the beliefs of our
management as well as on assumptions made by and information currently available
to us at the time the statements were made. When used in the Form 10-K, the
words "anticipate", "believe", "estimate", "expect", "may", "will", "could",
"should", "seeks", "pro forma" and "intend" and similar expressions, as they
relate to us are intended to identify the forward-looking statements. All
forward-looking statements attributable to persons acting on our behalf or us
are expressly qualified in their entirety by the cautionary statements set forth
here and in "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation--Risk Factors" on pages 48 to 58. We undertake no
obligation to publicly update or revise any forward-looking statements whether
as a result of new information, future events or for any other reason. Although
we believe that these statements are reasonable, you should be aware that actual
results could differ materially from those projected by the forward-looking
statements. For a discussion of factors that could cause actual results to
differ materially from the anticipated results or other expectations expressed
in our forward-looking statements, see the discussion of risk factors set forth
in "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation--Risk Factors" on pages 48 to 58. Because actual results
may differ, readers are cautioned not to place undue reliance on forward-looking
statements.

WEBSITE

We maintain a website on the Internet through which additional information
about Land O'Lakes, Inc. is available. Our website address is
www.landolakesinc.com. Our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports of Form 8-K, press releases and earnings releases are
available, free of charge, on our website as soon as practicable after they are
released publicly or filed with the SEC.

PART I

ITEM 1. BUSINESS.

Unless context requires otherwise, when we refer to "Land O'Lakes," the
"Company," "we," "us", or "our," we mean Land O'Lakes, Inc. together with its
consolidated subsidiaries.

OVERVIEW

We were formed as a Minnesota dairy cooperative corporation in 1921 and
entered the animal feed business in 1928. Since our formation, we have expanded
our business through acquisitions and joint ventures. In 1997, we merged with
Atlantic Dairy Cooperative, a Pennsylvania-based cooperative, which provided us
with increased butter production and access to raw milk near our largest butter
markets. In 1998, we merged with Dairyman's Cooperative Creamery Association of
Tulare, California, which increased our access to milk production in the western
United States. Also in 1998, we acquired many of the agricultural service assets
of Countrymark Cooperative, expanding our presence to the eastern Corn Belt in
feed, seed and agronomy. In 2000, we formed Agriliance, an unconsolidated joint
venture for the distribution of crop nutrient and crop protection products. We
have rationalized our business lines in order to concentrate on our core
businesses. In 2000, for example, we sold our fluid dairy business to Dean
Foods, and in 2001, we contributed our aseptic dairy products business to
Advanced Food Products, an unconsolidated joint venture. In October, 2000 we
formed Land O'Lakes Farmland Feed LLC ("Land O'Lakes Farmland Feed"), an animal
feed joint venture with Farmland Industries, Inc ("Farmland Industries"). Land
O'Lakes and Farmland Industries each contributed substantially all of the assets
of each of their North American animal feed businesses to form the joint
venture. On October 11, 2001, Land O'Lakes acquired Purina Mills, Inc. and
subsequently contributed Purina Mills, Inc. to Land O'Lakes Farmland Feed.

We are a leading producer of dairy products, animal feed and crop seed in
the United States. We market our dairy products under the LAND O LAKES, Alpine
Lace and New Yorker brands and the Indian Maiden logo. We market our animal
feed, other than dog and cat food, under the Purina and Chow brands and the
"Checkerboard" Nine-Square logo. We also market our animal feed products under
the Land O'Lakes Feed label. Our crop seed

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products are sold under the CROPLAN GENETICS brand. In addition to these three
segments, we also have swine and agronomy segments and various unconsolidated
joint ventures and investments.

BUSINESS SEGMENTS

See Notes to the Company's consolidated financial statements attached to
this annual report on Form 10-K for financial information on our business
segment.

DAIRY FOODS

Overview. We produce, market and sell butter, spreads, cheese and other
related dairy products. We sell our products under our national brand names,
including LAND O LAKES, the Indian Maiden logo and Alpine Lace, as well as under
our regional brands such as New Yorker. Our network of 15 dairy manufacturing
facilities is geographically diverse and allows us to support our customers on a
national scale. Our customer base includes major national supermarket and
supercenter chains, industrial customers, including major food processors, and
foodservice customers including restaurants, schools, hotels and airlines.

Products. We manufacture over 300 dairy-based food products. Our principal
dairy products and activities include:

Butter. We produce and market branded butter under our proprietary LAND
O LAKES brand name for retail and foodservice customers. In addition, we
produce nonbranded butter for our private label and industrial customers.
Our butter products include salted butter, unsalted butter, light butter,
whipped butter, flavored butter and our newest product, ultra creamy
butter.

Spreads. We produce and market a variety of spreads, including
margarine, nonbutter spreads and butter blends. These products are
primarily marketed under the LAND O LAKES brand and are sold to our retail,
foodservice and industrial customers.

Cheese. We produce and sell cheese for retail sale in deli and dairy
cases, to foodservice businesses and to industrial customers. Our deli
cheese products are marketed under the LAND O LAKES, Alpine Lace and New
Yorker brand names. Our dairy case cheese products are sold under the LAND
O LAKES brand name. We also sell cheese products to private label
customers. We offer a broad selection of cheese products, including cheddar
monterey jack, mozzarella, American and other processed cheeses.

Other. We manufacture nonfat dry milk and whey for sale to our
industrial customers. We produce nonfat dry milk by drying the nonfat milk
byproduct of our butter manufacturing process. It is used in processed
foods, such as instant chocolate milk. Whey is a valued protein-rich
byproduct of the cheesemaking process which is used in processed foods,
sports drinks and other nutritional supplements.

Raw Milk Wholesaling. We purchase raw milk from our members and sell it
directly to other dairy manufacturers, particularly fluid milk processors.
We generate substantial revenues but negligible margins on these sales. See
"Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Wholesaling and Brokerage Activities."

Sales, Marketing and Advertising. In order to meet the needs of our retail,
foodservice and industrial customers, we have sales efforts designed to service
each of these customer bases. Our retail customers are serviced through direct
sales employees and independent national food brokers. Our retail sales force
consists of 55 employees that service our larger retail customers, such as
supermarket and supercenter chains, and manage our national food broker
relationships. We have a relationship with a leading national food broker in the
United States, CROSSMARK, Inc. of Dallas, Texas.

We market our products to our industrial customers through a combination of
six dedicated salespeople and the efforts of the managers at our manufacturing
facilities. Our industrial customers generally maintain a direct relationship
with our facility managers in order to coordinate delivery and ensure that our
products meet their specifications.

Our foodservice products are primarily sold through independent regional
food brokers and food distributors. In addition, we employ 21 salespeople who
are responsible for maintaining these regional food broker relationships and
marketing to our large foodservice customers directly.

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Distribution. We contract with third-party trucking companies to distribute
our dairy products throughout the United States in refrigerated trucks. Our
dairy products are shipped to our customers either directly from the
manufacturing facilities or from one of our five regional distribution centers
located in New Jersey, Georgia, Illinois, California and Ohio. As most of our
dairy products are perishable, our distribution facilities are designed to
provide necessary temperature controls in order to ensure quality and freshness
of our products. The combination of our strategically located manufacturing and
distribution facilities and our logistics capabilities enables us to provide our
customers with a highly efficient distribution system.

Production. We produce our dairy products at 15 manufacturing facilities
strategically located throughout the United States. We also have contractual
arrangements whereby we engage other dairy processors to produce some of our
products. We believe the geographic distribution of our plants allows us to
service our customers in a timely and efficient manner. In 2002, we processed
approximately 7.9 billion pounds of milk, primarily into butter and cheese.
Butter is produced by separating the cream from milk, pasteurizing it and
churning the cream until it hardens into butter. Butter production levels
fluctuate due to the seasonal availability of milk and butterfat. The cheese
manufacturing process involves adding a culture and a coagulant to milk. Over a
period of hours, the milk mixture hardens to form cheese. At that point, whey is
removed and separately processed. Finally, the cheese is salted, shaped and
aged.

Supply and Raw Materials. Our principal raw material for production of dairy
products is milk. During 2002, we sourced approximately 93% of our raw milk from
our members. We enter into milk supply agreements with all of our dairy members
to ensure our milk supply. These contracts typically provide that we will pay
the producer for milk in the month following its delivery, at a price determined
by us, which typically includes a premium over Federal market order prices.
These contracts provide that we will purchase all of the milk produced by our
members for a fixed period of time, generally one year. As a result, we often
purchase more milk from our members than we require for our production
operations. There are three principal reasons for doing this: first, we need to
sell a certain percentage (which is not less than 10% of the amount procured and
depends on which Federal market order the milk is subject to) of our raw milk to
fluid dairy processors in order to participate in the Federal market order
system, which enables us to have lower input cost of milk; second, it decreases
our need to purchase additional supply during periods of low milk production in
the United States (typically August, September and October); and third, it
ensures that our members have a market for the milk they produce during periods
of high milk production. We enter into fixed-price forward sales contracts with
some of our large industrial cheese customers representing 10-15% of our
processed milk volume. We simultaneously enter into milk supply agreements with
a fixed price in order to ensure our margins on these contracts. We also
purchase cream, bulk cheese and bulk butter as raw materials for production of
our dairy products. We typically purchase cream pursuant to annual agreements
with fluid processors to purchase all of their cream production. We typically
purchase bulk cheese and butter pursuant to annual contracts. These cheese and
butter contracts provide for annual targets and delivery schedules and are based
on market prices. In isolated instances, we purchase these commodities on the
open market at current market prices. We refer to this type of transaction as a
spot market purchase.

Customers. We sell our dairy products directly and indirectly to over 500
customers. Our products are sold in over 5,000 retail locations, including
supermarkets and supercenters, convenience stores, warehouse club stores and
military commissaries. Our retail customers include supermarket and supercenter
chains. In addition, we sell our products through food brokers and distributors
to foodservice providers such as restaurant chains, schools, hotels and
airlines.

Research and Development. We seek to offer our customers product innovations
designed to meet their needs. In addition, we work on product and packaging
innovations to increase overall demand for our products and improve product
convenience. In 2002, we spent $11.5 million on dairy research and development,
and we employed approximately 66 individuals in research capacities at our
dedicated dairy foods research facility.

Competition. The bulk of the dairy industry consists of national and
regional competitors. Our branded cheese products compete with products from
national competitors such as Kraft, Borden and Sargento as well as several
regional competitors. For butter, our competition comes primarily from regional
brands, such as Challenge, Borden and Breakstone. Because our retail customers
are consolidating, we face increased competitive pressures. We rely on our
brands to differentiate our products from our competition. We believe our
branded products compete on the basis of brand name recognition, product quality
and reputation, and customer support. Products in the private label

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and industrial markets compete primarily based on price. We believe our product
quality and consistency of supply distinguishes our products in these markets.

ANIMAL FEED

Overview. Through Land O'Lakes Farmland Feed, we are the leading producer of
animal feed for both the commercial and lifestyle sectors of the animal feed
market in the United States. Our commercial feed products are used by farmers
and specialized livestock producers who derive income from the sale of milk,
eggs, poultry and livestock. Our lifestyle feed products are used by customers
who own animals principally for non-commercial purposes. Margins on our
lifestyle feed products are significantly higher than those on our commercial
feed products. We market our animal feed, other than dog and cat food, under the
leading brands in the industry, Purina, Chow and the "Checkerboard" Nine Square
logo. We also market our animal feed products under the Land O'Lakes Feed label.
As of December 31, 2002, we operated a geographically diverse network of 100
feed mills, which permits us to distribute our animal feed nationally through
approximately 1,300 of our local member cooperatives, through approximately
3,550 independent dealers operating under the Purina brand name and directly to
customers. We believe we are a leader among feed companies in animal feed
research and development with a focus on enhancing animal performance and
longevity. For example, we developed and introduced milk replacer for young
animals, and our patented product formulations make us the only supplier of
certain unique milk replacer products. These products allow dairy cows to return
to production sooner after birthing and increase the annual production capacity
of cows. We expect the addition of Purina Mills to our feed operations to
generate significant cost savings as we eliminate redundant facilities, reduce
overhead costs, increase capacity utilization, increase our purchasing economies
and improve our logistics and transportation system. We operate our feed
business entirely through our Land O'Lakes Farmland Feed joint venture,
including certain insignificant foreign investments and subsidiaries.

Products. We sell proprietary formulas of commercial and lifestyle animal
feed. We also produce commercial animal feed to meet our customers'
specifications. We sell feed for a wide variety of animals, such as dairy
cattle, beef cattle, swine, poultry, horses and other specialty animals such as
laboratory and zoo animals. Our principal feed products and activities include:

Complete Feed. These products provide a balanced mixture of grains,
proteins, nutrients and vitamins which meet the entire nutritional
requirement of an animal. They are sold as ground meal, in pellets or in
extruded pieces. Sales of complete feeds typically represent the majority of
net sales. We generally sell our lifestyle animal feed as complete feed. We
market our lifestyle animal feed to these customers through the use of our
strong trademarks, namely, Purina, Chow and the "Checkerboard" Nine Square
logo.

Supplements. These products provide a substantial part of a complete
ration for an animal, and typically are distinguished from complete feed
products by their lack of the bulk grain portion of the feed. Commercial
livestock producers typically mix our supplements with their own grain to
provide complete animal nutrition.

Premixes. These products are concentrated additives for use in
combination with bulk grain and a protein source, such as soybean meal.
Premixes consist of a combination of vitamins and minerals that are sold to
commercial animal producers and to other feed mill operators for mixing with
bulk grains and proteins.

Milk Replacers. Milk replacers, a product we invented, are sold to
commercial livestock producers to meet the nutritional requirements of their
young animals while increasing their overall production capability by
returning the parent animal to production faster. We market these products
primarily under our Maxi Care, Cow's Match and Amplifier Maxbrand names. We
have patents that cover certain aspects of our milk replacer products and
processes. Our two principal milk replacer patents expire in April 2015 and
April 2020.

Ingredient Merchandising. In addition to selling our own products, we
buy and sell or broker for a fee soybean meal and other feed ingredients. We
market these ingredients to our local member cooperatives and to other feed
manufacturers which use them to produce their own feed. Although this
activity generates substantial revenues, it is a very low-margin business.
We are generally able to obtain feed inputs at a lower cost as a result of
our ingredient merchandising business because of lower per unit shipping
costs associated with larger purchases and volume discounts.

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Sales, Marketing and Advertising. We employ approximately 450 direct
salespeople in regional territories. In our commercial feed business, we also
provide our customers with information and technical assistance through trained
animal nutritionists. We also provide information resources and technical
assistance to these nutritionists. Our advertising and promotional expenditures
are focused on higher margin products, specifically our lifestyle animal feed
and milk replacers. We advertise in recreational magazines to promote our
lifestyle animal feed products. To promote our horse feed products, we have
dedicated promoters who travel to rodeos and other horse related events. We
promote our milk replacers with print advertising in trade magazines. We spent
$17.9 million on advertising and promotion for the year ended December 31, 2002.

Distribution. We distribute our animal feed nationally primarily through our
network of approximately 1,300 local member cooperatives and approximately 3,550
Purina-branded dealers or directly to customers. We deliver our products
primarily by truck using our own fleet and independent carriers. Deliveries are
made directly from our feed mills to delivery locations within each feed mill's
geographic area.

Production. The basic feed manufacturing process consists of grinding
various grains and protein sources into meal and then mixing these materials
with certain nutritional additives, such as vitamins and minerals. The resulting
products are sold in a variety of forms, including meal, pellets, blocks and
liquids. Our products are formulated based upon proprietary research pertaining
to nutrient content. As of December 31, 2002, we operated 100 feed mills across
the United States. We have reduced the number of feed mills we operate by taking
advantage of the overlap between our existing facilities and those of Purina
Mills in certain local markets. Consistent with current industry capacity
utilization, our facilities operate below their capacity. With the reduction of
redundant facilities and conversion of certain facilities to a single product,
we expect to increase our capacity utilization. Our animal feed segment
operates, or has investments in, insignificant foreign operations in, Canada,
Mexico, United Kingdom and Taiwan.

Supply and Raw Materials. We purchase the bulk components of our products
from various suppliers and in the open ingredient markets. These bulk components
include corn, soybean meal and grain byproducts. In order to reduce
transportation costs, we arrange for delivery of these products to occur at our
feed mill operations throughout the United States. We purchase vitamins and
minerals from multiple vendors, including vitamin, pharmaceutical and chemical
companies.

Customers. Our customers range from large commercial corporations to
individuals. We also sell our animal feed products to local cooperatives. These
local cooperatives either use these products in their own feed manufacturing
operations or resell them to their customers. Our customers purchase our animal
feed products for a variety of reasons, including our ability to provide
products that fulfill some or all of their animals' nutritional needs, our
knowledge of animal nutrition, our ability to maintain quality control and our
available capacity.

Research and Development. Our animal feed research and development focuses
on enhancing animal performance and longevity. We also dedicate significant
resources to developing proprietary formulas that allow us to offer our
commercial customers alternative feed formulations using lower cost ingredients.
We employ 97 people in various animal feed research and development functions at
our research and development facilities. In 2002 we spent $9.8 million on
research and development.

Competition. The animal feed industry is highly fragmented. Our competitors
consist of many small local manufacturers, several regional manufacturers and a
limited number of national manufacturers. The available market for commercial
feed may become smaller and competition may increase as meat processors become
larger and integrate their business by acquiring their own feed production
facilities. In addition, purchasers of commercial feed tend to select products
based on price rather than manufacturer and some of our feed products are
purchased from third parties with minimal further processing by us. As a result
of these factors, the barriers to entry in the feed industry are low. The market
for lifestyle feed is also consolidating. We believe we distinguish ourselves
from our competitors through our high-performance, value-added products, which
we research, develop and distribute on a national basis. We believe our brands,
Purina, Chow and the "Checkerboard" Nine Square logo, provide us with a
competitive advantage as they are well-recognized, national brands for lifestyle
animal feed. We also compete on the basis of service by providing training
programs using animal nutritionists with advanced technical qualifications to
consult with local member cooperatives, independent dealers and livestock
producers, and by developing and manufacturing customized products to meet
customer needs.

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Governance. We operate our domestic feed business through our Land O'Lakes
Farmland Feed joint venture. Prior to the Purina Mills acquisition, we owned
73.7% of the joint venture. After the Purina Mills acquisition, we contributed
all of the equity interest in Purina Mills to Land O'Lakes Farmland Feed. As a
result, our ownership of Land O'Lakes Farmland Feed increased to 92.0%. We
manage Land O'Lakes Farmland Feed's day-to-day operations, and it is governed by
a five member board of managers. We have the right to appoint three members to
the board and Farmland Industries has the right to appoint two members to the
board. According to the terms of the Land O'Lakes Farmland Feed operating
agreement, actions of the board of managers require a majority vote. Certain
items require unanimous approval of the board of managers, including (1)
materially changing the scope of the business of the joint venture; (2) electing
to dissolve the joint venture; (3) selling all or substantially all of its
assets or significant assets; (4) requiring additional capital contributions;
(5) authorizing cash distributions of earnings; (6) changing income tax
elections or changing accounting practices to the extent they have a material
impact on Farmland Industries; (7) reducing the number of meetings of the
members committee to less than four per calendar year; (8) amending the
management services agreement with Land O'Lakes; and (9) adopting annual budgets
and business plans or any material amendments thereto.

Pursuant to the Land O'Lakes Farmland Feed operating agreement, we have a
one-time option to purchase Farmland Industries' interest in the joint venture
at a price to be determined by negotiation or appraisal. The option period runs
from September 1, 2003, to September 1, 2005. Farmland Industries may reject our
request to exercise our option; however, if Farmland Industries rejects our
request, the voting rights on the board will be allocated based upon Land
O'Lakes' and Farmland Industries' financial interests in Land O'Lakes Farmland
Feed, and the number of actions requiring unanimous consent of the board will be
limited to items (2), (4), (5), (6) and (8) above as well as any action that
affects one member or the other or any distribution which is not proportionate
to a member's ownership interest.

CROP SEED

Overview. We sell seed for a variety of crops, including alfalfa, soybeans,
corn and forage and turf grasses, under our CROPLAN GENETICS brand. We also
distribute certain crop seed products under third-party brands and under private
labels. Alfalfa is commonly grown for use in dairy and beef cattle nutrition. We
distribute our seed products through our network of local member cooperatives,
to other seed companies and to retail distribution outlets. We have strategic
relationships with Syngenta and Monsanto, two leading crop seed producers in the
United States, to which we provide distribution and research and development
services.

Products. We develop, produce and distribute seed products including seed
for alfalfa, soybeans, corn and forage and turf grasses. We also market and
distribute seed products produced by other crop seed companies, including seed
for corn, soybeans, sunflowers, canola, sorghum and sugar beets. Seed products
are often genetically engineered through selective breeding or gene splicing to
produce crops with specific traits. These traits include resistance to
herbicides and pesticides and enhanced tolerance to adverse environmental
conditions. As a result of our relationships with certain life science
companies, we believe we have access to one of the most diverse genetic
databases of any seed company in the industry. We also license some of our
proprietary alfalfa seed traits to other seed companies for use in their seed
products.

Sales, Marketing and Advertising. We have a sales force of approximately 128
employees who promote the sale of our seed products throughout the country,
particularly in the Midwest. Our sales and marketing strategy is built upon the
relationships we have established with our local member cooperatives and our
ability to purchase and distribute quality seed products at a low cost due to
our size and scale. We market our crop seed products under our brand name
CROPLAN GENETICS. We also distribute certain crop seed products under
third-party brands and under private label. We engage in a limited amount of
advertising, primarily utilizing marketing brochures and field signs. We are a
leader in online customer communications and order processing. We also
participate in the Total Farm Solutions program with our affiliate Agriliance.
Through this program, trained agronomists are placed at local cooperatives to
provide advisory services regarding crop seed and agronomy products.

Distribution. We distribute our seed products through our network of local
member cooperatives, to other seed companies and to retail distribution outlets.
We have relationships with Syngenta and Monsanto, two leading crop seed
producers in the United States, to which we provide distribution and research
and development services. We also sell our proprietary products under private
labels to other seed companies for sale through their distribution channels.
Additionally, several of our product lines (particularly turf grasses) are sold
to farm supply retailers and

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home and garden centers. We use third-party trucking companies for the
nationwide distribution of our seed products.

Supply and Production. Our alfalfa, soybeans, corn and forage and turf grass
seed are produced to our specifications and under our supervision on farms by
geographically diverse third-party producers. We maintain a significant
inventory of corn and alfalfa seed products in order to mitigate negative
effects caused by weather or pests. Our alfalfa and corn seed products can be
stored for up to four years after harvesting. Our crop seed segment has foreign
operations in Argentina and Canada.

Customers. We sell our seed products to over 6,500 customers, none of which
represented more than 3% of our crop seed net sales in 2002. Our customers
consist primarily of our local member cooperatives and other seed companies
across the United States and internationally. Our customer base also includes
retail distribution outlets.

Research and Development. We focus our research efforts on crop seed
products for which we have a significant market position, particularly alfalfa
seed. We also work with other seed companies to jointly develop beneficial crop
seed traits. In 2002, we spent $6.2 million on crop seed research and
development. As of December 31, 2002, we employed 20 individuals in research and
development capacities and had four research and development facilities.

Competition. Our competitors include Pioneer Hi-Bred International,
Monsanto, Syngenta and The Dow Chemical Company as well as many small niche seed
companies. We differentiate our seed business by supplying a branded,
technologically advanced, high quality product and by providing farmers with
access to agronomists through our joint Total Farm Solutions program with
Agriliance. These services are increasingly important as the seed industry
becomes more dependent upon biotechnology and crop production becomes more
sophisticated. Due to the added cost involved, our competitors, with the
exception of Pioneer, generally do not provide such services. We can provide
these services at a relatively low cost because we often share the costs of an
agronomist with Agriliance or with a local cooperative.

SWINE

We market both young weanling and feeder pigs (approximately 11 and 45
pounds respectively) and mature market hogs (approximately 260 pounds) under
three primary programs: swine aligned, farrow-to-finish, and cost-plus. Under
the swine aligned program, we own sows and raise feeder pigs for sale to our
local member cooperatives. We raise market hogs for sale to pork processors
under our farrow-to-finish program. The cost-plus operation provides minimum
price floors to producers for market hogs. The price floor fluctuates based on
the cost of corn and soybean meal. The majority of our cost-plus contracts will
expire in late 2003 and early 2004 and all contracts will have expired no later
than 2005. We are not entering into new cost-plus contracts.

We own approximately 65,000 sows producing approximately 623,000 feeder pigs
and 584,000 market hogs annually at facilities we own or lease and at facilities
owned by approximately 154 contract producers. The dramatic volatility in the
live hog market in 2002, 1999 and 1998, where selling prices were well below
cost, resulted in our swine operations generating losses primarily in connection
with our cost-plus and our farrow-to-finish programs. In 2002 the average price
per hundred weight was $36 compared to $47 in 2001.

Historically, Purina Mills reported results of its swine business together
with its feed business. Accordingly, the portion of our swine business which we
acquired from Purina Mills in October 2001 is reported within our feed segment.
Purina Mills operates its swine business under the pass-through program and the
market risk sharing program. Under the pass-through program, we enter into
commitments to purchase weanling and feeder pigs from producers and generally
have commitments to immediately resell the animals to swine producers. The
market risk sharing program provides minimum price floors to producers for
market hogs. The price floor in our market risk sharing program floats with the
market price of hogs and the cost of swine feed. For a discussion of our swine
accounting and results see "Item 7: Management's Discussion and Analysis of
Financial Condition and Results of Operation."

9

AGRONOMY

Our agronomy segment consists primarily of joint ventures and investments
that are not consolidated in our financial results. The two most significant of
these are Agriliance and CF Industries. As a result, our agronomy segment has no
net sales, but we allocate overhead to selling and administration and may
recognize patronage as a reduction in cost of sales. See "Joint Ventures and
Investments" for a discussion of the business of Agriliance and CF Industries.
For a discussion of our agronomy accounting and results see "Item 7:
Management's Discussion and Analysis of Financial Condition and Results of
Operation."

OTHER

We also operate various other wholly-owned businesses such as LOL Finance
Co., which provides financing to farmers and livestock producers.

JOINT VENTURES AND INVESTMENTS

Other than Cheese & Protein International LLC ("Cheese & Protein
International"), which is a consolidated unrestricted subsidiary, the joint
ventures and investments described below are unconsolidated.

AGRILIANCE LLC. Agriliance, a 50/50 joint venture with United Country Brands
(jointly owned by CHS Cooperatives and Farmland Industries) was formed for the
purpose of distributing and manufacturing agronomy products. Prior to the
contribution of our agronomy assets to Agriliance, the financial results of
these assets were consolidated for financial reporting purposes.

Products. Agriliance markets and sells two primary product lines: crop
nutrients (including fertilizers and micronutrients) and crop protection
products (including herbicides, pesticides, fungicides and adjuvants). For
Agriliance's fiscal year ended August 31, 2002, approximately 87% of these
products were manufactured by third-party suppliers and marketed under the
suppliers' brand names. The remaining 13% was either manufactured by Agriliance
or by a third-party supplier and marketed under the brand names Agrisolutions
(for herbicides, pesticides and related products) and Origin (for
micronutrients).

Sales and Marketing. Agriliance has an internal sales force of approximately
100 employees. Agriliance's sales and marketing efforts serve the entire United
States, with its primary focus on the area from the Midwest to the eastern Corn
Belt. Agriliance's strategy is built upon strong relationships with local
cooperatives and Agriliance's ability to purchase and distribute quality
agronomy products at a low cost due to its size and scale. Agriliance engages in
a limited amount of advertising in trade journals and produces marketing
brochures and advertisements utilized by local cooperatives. In addition,
Agriliance assists local member cooperatives and independent farmers by
identifying, recruiting and training agronomists who provide advice relating to
agronomy products. In the Midwest, Agriliance has implemented the Total Farm
Solutions program, an effort to utilize the expertise of the agronomists to
bundle Agriliance products with our seed products.

Production, Source of Supply and Raw Materials. Agriliance operates
primarily as a wholesale distributor of products purchased from other
manufacturers. Agriliance's primary suppliers of crop protection products are
Syngenta, Monsanto, BASF, Dow Chemical, DuPont and Aventis. Agriliance enters
into annual distribution agreements with these manufacturers. However,
Agriliance manufactures approximately 10% of its proprietary crop protection
products. Agriliance's production facilities are located in Iowa, Arkansas,
Missouri and Minnesota. Agriliance procures approximately 65% of its fertilizer
needs from CF Industries, of which we are a member, and Farmland Industries.
Farmland Industries initiated Chapter 11 bankruptcy proceedings on May 31, 2002.
Agriliance has other sources of supply that it could use to fill its anticipated
fertilizer needs in the event Farmland Industries fails to meet its delivery
obligations to Agriliance. Agriliance currently sources their remaining
fertilizer supply needs from a variety of suppliers including PCS, IMC, Terra
Nitrogen, Mississippi Chemical and Agrium. Agriliance also produces
micronutrient products. In 2002, approximately 58% of Agriliance's agronomy
products were sourced from three suppliers.

Customers and Distribution. Agriliance's customer base consists primarily of
farmers, many of whom are members of our local cooperatives. Agriliance
distributes its products through our local member cooperatives and also through
retail agronomy centers owned by Agriliance. Agriliance stores inventory at a
number of strategically

10

positioned locations, including leased warehouses and storage space at local
cooperatives. Agriliance serves most of the key agricultural areas of the United
States, with its customers and distribution concentrated in the Midwest.

Competition. Agriliance's primary competitors are national crop nutrient
distributors, such as Cargill, IMC, PCS, Agrium and Royster Clark, national crop
protection product distributors, such as UAP, Helena and Wilbur-Ellis, as well
as smaller regional brokers and distributors. This wholesale agronomy industry
is consolidating as distributors attempt to expand their distribution
capabilities and efficiencies. Wholesale agronomy customers tend to purchase
products based upon a distributor's ability to provide ready access to product
at critical times prior to and during the growing season. In addition, certain
customers purchase on the basis of price. We believe Agriliance distinguishes
itself from its competitors as a result of its distribution network, which
enables it to efficiently distribute product to customers. In addition,
Agriliance provides access to trained agronomists who give advice to farmers on
both agronomy and crop seed products to optimize their crop production.

Governance. Agriliance is managed by a four member board of managers. We and
United Country Brands each have the right to appoint two of the managers.
Certain actions require the unanimous approval of the board, including (1)
adopting or amending the annual business plan; (2) distributing products
produced by Agriliance to anyone other than the members or patrons of
Agriliance's members; (3) approving capital expenditures related to the
expansion of Agriliance's production capabilities, purchasing additional
inventory or changing the types of products produced by Agriliance; (4)
incurring indebtedness other than in the ordinary course of business; (5)
appointing, replacing, or discharging an executive officer; (6) making
distributions to members; and (7) changing income tax or special accounting
elections. Pursuant to the terms of Agriliance's operating agreement, Land
O'Lakes, CHS Cooperatives and Farmland Industries have all agreed to refrain
from directly or indirectly engaging in the wholesale marketing of fertilizer
and agricultural chemicals in North America, except through Agriliance, for so
long as they, or an entity in which they are a material owner, remain a member
of Agriliance, and for a period of four years following termination of their
membership.

MOARK LLC. In January 2000, we formed MoArk LLC, a joint venture of which we
currently own 57.5% with Osborne Investments, LLC, to produce and market eggs
and egg products. We increased our ownership percentage from 50% to 57.5% in
February 2003 for $7.8 million. We have the right to purchase from Osborne (and
Osborne has the right to cause us to buy from them) their interest in MoArk for
a minimum purchase price of $42.2 million (adjusted for tax benefits received by
Osborne and purchase price already paid) or a greater amount based upon MoArk's
performance over time. These rights are exercisable in January 2007. Although
Osborne has a 42.5% interest in MoArk, we are allocated 100% of the income or
loss of MoArk (other than on capital transactions involving realized gain or
loss on intangible assets, which are allocated 50/50). In addition to the $7.8
million payment made by Land O'Lakes in February, MoArk is obligated to make
four guaranteed payments to Osborne in 2004, 2005, 2006 and 2007, each in the
amount of $1,445,000.

Products. MoArk produces and markets shell eggs and egg products that are
sold at retail and wholesale for consumer and industrial use throughout the
United States. As of December 31, 2002, MoArk marketed and processed eggs from
approximately 37 million layers (hens) which produced approximately 740 million
dozen eggs annually. Approximately 41% of the eggs and egg products marketed are
produced by layers owned by MoArk. The remaining 59% are purchased on the spot
market or from third-party producers. Shell eggs represent approximately 78% of
eggs MoArk sells annually, and the balance are broken for use in egg products
such as refrigerated liquid, frozen, dried and extended shelf life liquid. MoArk
recently launched a high quality, all natural shell egg product marketed under
the LAND O LAKES brand name in a Northeast market. Through MoArk's acquisition
of Cutler Egg Products in April 2001, MoArk acquired a patented process that
extends the shelf life of a refrigerated liquid egg product utilizing an
ultra-pasteurization process.

Customers and Distribution. MoArk has approximately 950 retail grocery,
industrial, foodservice and institutional customers. While supply contracts
exist with a number of the larger retail organizations, the terms are typically
market based, annual contracts and allow early cancellation by either party.
MoArk primarily delivers directly to its customer (store to door delivery).
Alternatively, some customers pick up product at one of MoArk's facilities.

Sales and Marketing. MoArk's internal sales force maintains direct
relationships with customers. MoArk also uses food brokers to maintain select
accounts and for niche and "spot" activity in situations where MoArk cannot
effectively support the customer or needs to locate a customer or customers for
excess products. With the exception

11

of the advertising activity associated with the launch of the LAND O LAKES brand
eggs, amounts spent for advertising are insignificant.

Competition. MoArk competes with other egg processors, including Cal-Maine
Foods, Rose Acre Farms, Inc. and Michael Foods. MoArk competes with these
companies based upon its low cost production system, its high margin regional
markets and its diversified product line.

Governance. We are entitled to appoint three managers to the board of
managers of MoArk, and Osborne has the right to appoint the remaining three
managers until its governance interest has been transferred to us. According to
the terms of MoArk's operating agreement, two managers elected by us and two
managers elected by Osborne constitute a quorum. Actions of the board of
managers require a unanimous vote of a quorum of the board of managers. MoArk is
required to maintain at all times a net worth in excess of $40.0 million. If
MoArk's net worth were to decline below $40.0 million, we would be required to
contribute the necessary funds in order to maintain the $40.0 million net worth.
As of December 31, 2002, MoArk's net worth was approximately $93 million. In the
event we decide to sell or transfer any or part of our economic and governance
interest in MoArk, including our right to cause the transfer of the governance
interest owned by Osborne, we must first offer to sell or transfer to Osborne
all of the rights and interests to be sold or transferred at a similar price and
under similar material terms and conditions.

CHEESE & PROTEIN INTERNATIONAL LLC. Cheese & Protein International, a 95% owned
consolidated joint venture with a subsidiary of Mitsui & Co. (USA), has
constructed and is operating a mozzarella cheese and whey plant in Tulare,
California. Commercial production commenced in May 2002. In connection with the
formation of the venture, we entered into a marketing agreement with Mitsui and
Cheese & Protein International which gives us the right to distribute the
products produced by the venture in the United States and gives Mitsui the right
to distribute the same products outside the United States. Once the start-up
phase is complete, the purchase price for all products will be based upon the
market prices for such product. We have also contracted with Cheese & Protein
International to provide no less than 70% of their milk requirements at prices
based upon market prices for milk. In addition, we have agreed to purchase no
less than 70% of Cheese & Protein International's estimated production of
mozzarella cheese, based upon market prices. This venture is governed by a 10
member committee. We have the right to appoint seven members to the committee.
The remaining three members are appointed by our joint venture partner.
Notwithstanding the foregoing, on November 25, 2002, Mitsui provided notice of
its intent to exercise a put option which, if exercised, would have required us
to purchase its thirty percent equity interest in CPI. Before the exercise date,
however, Mitsui elected to maintain a five percent ownership stake and agreed to
continue to negotiate with us regarding, among other things, its ownership
percent, its role in governance and its marketing rights. We are close to
reaching an agreement and we expect that Mitsui will continue to be a partner in
the joint venture going forward. If we are unable to reach agreement on or
before June 1, 2003, however, we have agreed to purchase Mitsui's remaining five
percent interest. If we acquire Mitsui's remaining equity interest after June
30, 2003, and if we do not replace Mitsui with another partner, CPI would become
a restricted subsidiary at that time. As a restricted subsidiary, CPI's
on-balance sheet debt and earnings would be included in the covenant
calculations for our credit facilities. Further, as a Restricted Subsidiary, CPI
would be required to guarantee our credit facilities and our senior unsecured
indebtedness. However, for as long as CPI remains non-wholly owned, it will
continue to be unrestricted for purposes of the credit facilities, and will not
be required to guarantee the credit facilities or the senior unsecured
indebtedness.

ADVANCED FOOD PRODUCTS, LLC. We own a 35% interest in Advanced Food
Products, a joint venture which manufactures and markets a variety of custom and
noncustom aseptic products. Aseptic products are manufactured to have extended
shelf life through specialized production and packaging processes, enabling food
to be stored without refrigeration until opened. We formed Advanced Food
Products in 2001, with a subsidiary of Bongrain, S.A., a French food company,
for the purpose of manufacturing and marketing aseptically packaged cheese
sauces, snack dips, snack puddings, and ready to drink dietary beverages. The
venture is governed by a six member board of managers, and we have the right to
appoint two members. Bongrain manages the day-to-day operations of the venture.

CF INDUSTRIES, INC. CF Industries is one of North America's largest
interregional cooperatives, and is owned by ten cooperatives. CF Industries
manufactures fertilizer products, which are distributed by its members or their
affiliates. CF Industries has manufacturing facilities in Louisiana, Alberta,
Canada and Florida. As of December 31, 2002, our percentage of ownership of
allocated equity of CF Industries was 38%. Each of the members, including

12

Land O'Lakes, has the right to elect one director to the board of directors. The
day-to-day operations of the cooperative are managed by the officers of CF
Industries who are elected by its board of directors.

COBANK. CoBank is a cooperative lender of which we are a member. Our equity
interest in CoBank and the amount of patronage we receive is dependent upon our
outstanding borrowings from CoBank.

AG PROCESSING. Ag Processing is a cooperative that produces soybean meal and
soybean oil. As a member of Ag Processing, we are entitled to patronage based
upon our purchases of these products. We use soybean meal as an ingredient in
our feed products. Soybean oil is an ingredient used to produce our dairy spread
products.

DESCRIPTION OF THE COOPERATIVE

Land O'Lakes is incorporated in Minnesota as a cooperative corporation.
Cooperatives resemble traditional corporations in most respects, but with two
primary distinctions. First, a cooperative's common shareholders, its "members",
either supply the cooperative with raw materials or purchase its goods and
services. Second, to the extent a cooperative allocates its earnings from member
business to its members and meets certain other requirements, it is allowed to
deduct this "patronage income," known as "qualified" patronage income, from its
taxable income. Patronage income is allocated in accordance with the amount of
business each member conducts with the cooperative.

Cooperatives typically derive a majority of their business from members,
although they are allowed by the Internal Revenue Code to conduct non-member
business. Earnings are designated as "pool" earnings or "non-pool" earnings
according to the Internal Revenue Code and decisions made by each cooperative.
Pool earnings are then segregated into earnings generated from member and
non-member business. Pool earnings may be treated as patronage income if they
are generated from business conducted with or for a member of the cooperative.
Non-pool earnings and earnings from non-member business are taxed as corporate
income in the same manner as a typical corporation. The after-tax amount is
retained as permanent equity by the cooperative. Pool earnings from member
business are either allocated to patronage income or retained as permanent
equity (in which case it is taxed as corporate income) or some combination
thereof.

In order to obtain favorable tax treatment on allocated patronage income,
the Internal Revenue Code requires that at least 20% of each member's annual
allocated patronage income be distributed in cash. The portion of patronage
income that is not distributed in cash is retained by the cooperative, allocated
to member equities and distributed to the member at a later time as a
"revolvement" of equity. The cooperative's members must recognize the amount of
allocated patronage income (whether distributed to members or retained by the
cooperative) in the computation of their individual taxable income.

At their discretion, cooperatives are also allowed to designate patronage
income as "nonqualified" patronage income and allocate it to member equities.
Unlike qualified patronage income, the cooperative pays taxes on this
nonqualified patronage income as if it was derived from non-member business. The
cooperative's members do not include undistributed nonqualified patronage income
in their current taxable income. However, the cooperative may revolve the equity
representing the nonqualified patronage income to members at some later date,
and is allowed to deduct those amounts from its taxable income at that time.
When nonqualified patronage income is revolved to the cooperative's members, the
revolvement must be included in the members' taxable income.

OUR STRUCTURE AND MEMBERSHIP

We have both voting and nonvoting members, with differing membership
requirements for cooperative and individual members. We also separate our
members into two categories: "dairy members" supply our dairy foods segment with
dairy products, primarily milk, cream, cheese and butter, and "ag members"
purchase agricultural products, primarily agronomy products, feed and seed from
our other operations or joint ventures. We further divide our dairy and ag
members by region. There are eight dairy regions and five ag regions.

All of our members must purchase stock and comply with uniform conditions
prescribed by our board of directors and by-laws. The board of directors may
terminate a membership if it determines that the member has failed to adequately
patronize us or has become our competitor.

13

A cooperative voting member (a "Class A" member) must be an association of
producers of agricultural products operating on a cooperative basis engaged in
either the processing, handling, or marketing of its members' products or the
purchasing, producing, or distributing of farm supplies or services. Class A
members are entitled to a number of votes based on the amount of business done
with the Company. Class A members tend to be ag members, although a Class A
member may be both an ag and dairy member if they both supply us with dairy
products and purchase agricultural products from us or our joint ventures.

An individual voting member (a "Class B" member) is an individual,
partnership, corporation or other entity other than a cooperative engaged in the
production of agricultural commodities. Class B members are entitled to one
vote. Class B members tend to be dairy members. Class B members may be both an
ag and dairy member if they both provide us with dairy products and purchase
agricultural products from us or our joint ventures.

Our nonvoting cooperative members ("Class C" members) are associations
operating on a cooperative basis but whose members are not necessarily engaged
in the production or marketing of agricultural products. Such members are not
given the right to vote, because doing so may jeopardize our antitrust exemption
under the Capper-Volstead Act (the exemption requires all our voting members be
engaged in the production or marketing of agricultural products). Class C
members also include cooperatives which are in direct competition with us.
Nonvoting individual members ("Class D" members) generally do a low volume of
business with us and are not interested in our governance.

GOVERNANCE

Our board is made up of 24 directors. Our dairy members nominate 12
directors from among the dairy members and our ag members nominate 12 directors
from among the ag members. The nomination of directors is conducted within each
group by region. The number of directors nominated from each region is based on
the total amount of business conducted with the cooperative by that region's
members. Directors are elected to four year terms at our annual meeting by
voting members in a manner similar to a typical corporation. Our by-laws require
that, at least every five years, we evaluate both the boundaries of our regions
and the number of directors from each region, so that the number of directors
reflects the proportion of patronage income from each region.

The board may also choose to elect up to three non-voting advisory members.
Currently, we have one such member. The board governs our affairs in the same
manner as the boards of typical corporations that are not organized as
cooperatives.

EARNINGS

As described above, we divide our earnings between pool and non-pool and
member and non-member business. We then allocate member earnings to dairy foods
operations or agricultural operations (which is comprised of our feed, crop
seed, agronomy and swine segments). Pool earnings from each of our segments are
currently maintained in separate pools. We have also established a second pool
for our dairy foods segment for farmers who sell milk to us for resale as
commodity fluid milk. For our dairy foods operations, the amount of member
business is based on the amount of dairy products supplied to us by our dairy
members. In calendar year 2002, 69.1% of our dairy input requirements came from
our dairy members. For our agricultural operations, the amount of member
business is based on the dollar-amount of products sold to our agricultural
members. In calendar year 2002, 83% of our agricultural products net sales, and
86% of our operating income, was derived from sales to agricultural members.

PATRONAGE INCOME AND EQUITY

To acquire and maintain adequate capital to finance our business, our
by-laws allow us to retain up to 15% of our earnings from member business as
additions to permanent equity. We currently retain 10% and allocate the
remainder of our earnings from member business to patronage income.

We have two plans through which we revolve patronage income to our members:
the Equity Target Program for our dairy foods operations and the Revolvement
Program for our agriculture businesses.

The Equity Target Program provides a mechanism for determining the capital
requirements of our dairy foods operations and each dairy member's share of
those requirements. The board of directors has established an equity

14

target investment of $2.75 per hundred pounds of milk (or milk equivalent)
delivered per year by that member to us. We distribute 20% of allocated
patronage income to a dairy member annually until the investment target is
reached by that member. The remaining 80% of allocated patronage income is
retained and allocated to member equities and revolved in the twelve years after
the member becomes inactive. When the member's equity investment reaches the
target, and for as long as the member's equity target investment is maintained,
we distribute 100% of the member's future allocated patronage income. The equity
target as well as the revolvement period may be changed at the discretion of the
board.

For calendar year 2001, we allocated $33.5 million of our member earnings as
patronage income to our dairy members. Of that amount, 94% or $31.6 million was
allocated to dairy members who have yet to reach their equity target investment,
and we distributed $6.1 million (20%) to those members and retained and
allocated $25.5 million (80%) to member equities. Also, 6% or $1.9 million was
distributed to dairy members who have met their equity investment requirement.
We did not allocate any of our member earnings as nonqualified patronage
refunds. We plan to revolve $16.8 million of dairy members' equity for 2002 to
be paid in 2003. For 2002, we allocated $0 as patronage income to dairy members.

In the Revolvement Program for our agricultural businesses, we currently
distribute 30% of allocated patronage income in cash and retain and allocate the
remaining 70% to member equity. This equity is revolved 9 1/2 years later. Both
the amount distributed in cash and the revolvement period are subject to change
by the board. For calendar year 2001, we allocated $40.2 million of our member
earnings to our agricultural members. Of that amount, we paid patronage income
of $12.1 million to our members in cash and retained and allocated $28.1 million
to member equities. Our board suspended revolvement of ag member equities for
the 2001 and 2002 fiscal years.

In 2002, we allocated $96.9 million of our member earnings to our
agricultural members. Of these net earnings, $83.2 million was designated as
nonqualified patronage in connection with legal settlement proceeds. We paid
income tax on this nonqualified patronage, however, we will be able to deduct
these earnings from our taxable income if we choose to revolve the earnings to
our members in the future. Revolvement of the equity representing this
nonqualified patronage income is subject to board approval.

Our Estate Redemption Plan provides that we will redeem equity holdings of
deceased natural persons upon the demise of the owner. The Company's Age
Retirement Program provides that we will redeem in full equity holdings of dairy
members who are natural persons when the member reaches age 75 or older and
becomes inactive. Subject to various requirements, we may redeem the equity
holdings of members in bankruptcy or liquidation. All equity redemptions must be
presented to, and receive the approval of, our board of directors before
payment. We plan to revolve $3.3 million of member equities in connection with
these programs in 2002 and expect to revolve approximately $3.5 million in 2003.

EMPLOYEES

At March 1, 2003, we had approximately 8,000 employees, approximately 20% of
whom were represented by unions having national affiliations. Our contracts with
these unions expire at various times throughout the next several years, with the
last contract expiring on January 1, 2005. We consider our relationship with
employees to be generally satisfactory. We have had no labor strikes or work
stoppages within the last five years.

PATENTS, TRADEMARKS AND INTELLECTUAL PROPERTY

We rely on patents, copyrights, trademarks, trade secrets, confidentiality
provisions and licensing arrangements to establish and protect our intellectual
property. We believe that in addition to certain patented processes, the
formulas and production methods of our dairy foods products are trade secrets.
We also have patented formulations and processes for our milk replacer products
and deem our feed product formulations to be proprietary.

We own a number of registered and unregistered trademarks used in connection
with the marketing and sale of our food products as well as our feed and seed
products including LAND O LAKES, and the Indian Maiden logo, Alpine Lace, New
Yorker, Extra Melt, GRIP 'N GO, CROPLAN GENETICS, Maxi Care, Amplifier Max and
Omolene. Land O'Lakes Farmland Feed licenses certain trademarks from Land
O'Lakes, including LAND O LAKES, the Indian Maiden logo, Maxi Care, and
Amplifier Max, for use in connection with its animal feed and milk replacer
products. Purina Mills, a wholly-owned subsidiary of Land O'Lakes Farmland Feed,
licenses the

15

trademarks Purina, Chow and the "Checkerboard" Nine Square logo from Nestle
Purina PetCare Company under a perpetual, royalty-free license. This license
only gives Purina Mills the right to use these trademarks to market the
particular products that Purina Mills currently markets with these trademarks.
Purina Mills does not have the right to use these trademarks outside of the
United States, or in conjunction with any products designed primarily for use
with cats, dogs or humans. We do not have the right to assign any of these
trademarks without the written consent of Nestle Purina PetCare Company. These
trademarks are important to Land O'Lakes Farmland Feed because brand name
recognition is a key factor to its success in marketing and selling its
products. The registrations of these trademarks in the United States and foreign
countries are effective for varying periods of time, and may be renewed
periodically, provided that we, as the registered owner, or our licensees, where
applicable, comply with all applicable renewal requirements including, where
necessary, the continued use of the trademarks in connection with similar goods.

In 2002, we expanded our licensing agreement with Dean Foods. Under the
expanded agreement, Dean Foods is granted exclusive rights to use the Land
O'Lakes brand and the Indian Maiden logo in connection with the manufacturing,
marketing, promotion, distribution and sale of certain products, including, but
not limited to, basic dairy products (milk, yogurt, cottage cheese, ice cream,
eggnog, juices and dips), creams, small bottle milk, infant formula products and
soy beverage products. Dean Foods is also granted the right to use the Company's
patented Grip 'n Go bottle and the Company's formula to fat-free half & half.
With respect to the basic dairy products and the small bottle milk, the license
is granted on a royalty-free basis. With respect to the remaining products
covered by the license agreement, Dean Foods will pay a sales-based royalty,
subject to a guaranteed minimum annual royalty payment. In addition, the license
agreement is terminable by either party in the event that certain minimum
thresholds are not met on an annual basis.

We have also entered into other license agreements with other affiliated and
unaffiliated companies, such as MoArk, which permit these companies to utilize
our trademarks in connection with the marketing and sale of certain products.

ENVIRONMENTAL MATTERS

We are subject to various Federal, state, local, and foreign environmental
laws and regulations, including those governing the use, storage, discharge and
disposal of hazardous materials. Violations of these laws and regulations may
lead to civil and criminal fines and penalties or other sanctions. These laws
and regulations may also impose liability for the cleanup of environmental
contamination. We generate large volumes of waste water. Changes in
environmental regulations governing disposal of these materials could have a
material adverse effect on our business, financial condition or results of
operations.

We use regulated substances in operating our manufacturing equipment and we
use and store other chemicals on site (including acids, caustics and
refrigeration chemicals). Agriliance stores petroleum products and other
chemicals on-site (including fertilizers, pesticides and herbicides). Discovery
of significant contamination or changes in environmental regulations governing
the handling of these materials could have a material adverse effect on our
business, financial condition or results of operations.

Many of our current and former facilities have been in operation for many
years, and over that time, we and other operators of those facilities have
generated, used, stored, or disposed of substances or wastes that are or might
be considered hazardous under applicable environmental laws, including chemicals
and fuel stored in underground and above-ground tanks, animal wastes and large
volumes of wastewater discharges. As a result, the soil and groundwater at or
under certain of our current and former facilities (and/or in the vicinity of
such facilities) may have been contaminated, and we may be required to make
material expenditures to investigate, control and remediate such contamination.

We are also potentially responsible for environmental conditions at a number
of former facilities and at waste disposal facilities operated by third parties.
We have been identified as a Potentially Responsible Party ("PRP") under the
federal Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA" or "Superfund") at various National Priorities List ("NPL") sites and
have unresolved liability with respect to the past disposal of hazardous
substances at several such sites. CERCLA may impose joint and several liability
on certain statutory classes of persons for the costs of investigation and
remediation of contaminated properties, regardless of fault or the legality of
the original disposal. These persons include the present and former owners or
operators of a

16

contaminated property, and companies that generated, disposed of, or arranged
for the disposal of hazardous substances found at the property. We have
contested our liability at one Superfund site, as to which we have declined to
pay past response costs associated with ongoing site study, and we have received
a notice of potential liability regarding three other waste disposal sites under
investigation by the EPA, as to which we are disputing our responsibility.

We have, on average, paid less than $500,000 in each of the last five years
for investigation and remediation of environmental matters, including Superfund
and related matters, but there can be no assurance that expenditures for such
activities will not rise materially if substantial contamination is discovered
at one of our current or former facilities or if other PRPs fail or refuse to
participate in cost sharing at any Superfund site, or similar disposal site, at
which we are implicated.

In addition, Federal and state environmental authorities have proposed new
regulations and have attempted to apply certain existing regulations for the
first time to agricultural operations. These regulations could result in
significant restraints on some of our operations, particularly our swine
operations, and could require us to spend significant amounts to bring these
operations into compliance. In addition, any failure to comply could result in
the imposition of fines and penalties. We cannot predict whether future changes
in environmental laws or regulations will materially increase the cost of
operating our facilities and conducting our business. Any such changes could
adversely affect our business, financial condition and results of operations.

REGULATORY MATTERS

We are subject to Federal, state and local laws and regulations relating to
the manufacturing, labeling, packaging, health and safety, sanitation, quality
control, fair trade practices, and other aspects of our business. In addition,
zoning, construction and operating permits are required from governmental
agencies which focus on issues such as land use, environmental protection, waste
management, and the movement of animals across state lines. These laws and
regulations may, in certain instances, affect our ability to develop and market
new products and to utilize technological innovations in our business. In
addition, changes in these rules might increase the cost of operating our
facilities or conducting our business which would adversely affect our finances.

Our dairy business is affected by Federal price support programs and federal
and state pooling and pricing programs. Since 1949, the Federal government has
maintained price supports for cheese, butter and nonfat dry milk. The government
stands as a ready purchaser of these products at their price support levels.
Historically, when the product price reached 110% of its price support level,
the government would sell its inventory into the market, effectively limiting
the price of these products. Because prices for these products have generally
been higher than their support level for a number of years, the government
currently has minimal inventories of cheese and butter. As a result, these
commodity prices have been able to be greater than 110% of their price support
levels for several years. According to data from the USDA, over the past five
years, butter has sold at an average of 176% of the support price without
reaching support levels, and cheese has sold at an average of 121% of the
support price. However, cheese sold at or near support levels at points between
October 2000 and January 2001. The Farm Security and Rural Investment Act of
2002 extends the dairy price support program through December 31, 2007.

Federal and certain similar state regulations attempt to ensure that the
supply of raw milk flows in priority to fluid milk and soft cream producers
before producers of hard products such as cheese and butter. This is
accomplished in two ways. First, the Federal market order system sets minimum
prices for raw milk. The minimum price of raw milk for use in fluid milk and
soft cream production is set as a premium to the minimum price of raw milk used
to produce hard products. The minimum price of raw milk used to produce hard
products is, in turn, set based on the market prices of cheese and butter.
Second, the Federal market order system establishes a pooling program under
which participants are required to send at least some of their raw milk to fluid
milk producers. The specific amount varies based on region, but is at least 10%
of the raw milk a participant handles. Certain areas in the country, such as
California, have adopted systems which supersede the Federal market order system
but are similar to it. In addition, because the Federal market order system is
not intended as an exclusive regulation of the price of raw milk, certain states
have, and others could, adopt regulations which could increase the price we pay
for raw milk, which could have an adverse effect on our financial results. We
also pay a premium above the market order price based on competitive conditions
in different regions.

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Producers of dairy products which are participants in the Federal market
order system pay into regional "pools" for the milk they use based on the amount
of each class of dairy product produced and the price of those products. As
described above, only producers of dairy products who send the required minimum
amount of raw milk to fluid milk producers may participate in the pool. The
amounts paid into the pool for raw milk used to make fluid milk and soft creams
are set at a premium to the amounts paid into the pool for raw milk used to make
cheese or butter. The pool then returns to each dairy product producer for raw
milk it handled the weighted average price for all raw milk (including that used
for fluid milk and soft creams, whose producers must pay into the pool) sold in
that region. The dairy product producer pays at least this pool price to the
dairy farmer for milk received. This pooling system provides an incentive for
hard product producers to participate in the pool (and therefore supply the
required minimum for fluid milk production), because the average price for raw
milk received by these producers from the pool is more than the average price
they pay into the pool.

As a cooperative, we are exempt from the requirement that we pay pool prices
to our members for raw milk supplied to us. However, as a practical matter, we
must pay a competitive price to our members in order to ensure adequate supply
of raw milk for our production needs, and therefore our operations are affected
by these regulations.

If we did not participate in the pool, we would not receive the advantage of
the average pool payment and we would not be able to pay our milk producers as
much as participating processors without incurring higher costs for our raw
milk. To maintain our participation in the federal market order program and
avoid this competitive disadvantage, we must procure at least 110% of our raw
milk requirements to meet our production needs. If we are unable to procure at
least 110% of our requirements, we would have lower production which could have
a material adverse affect on our results of operations. In addition, if the pool
was eliminated we would be subject to additional market forces when procuring
raw milk, which could result in increased milk costs and decreased supply, which
could materially affect our business.

As a manufacturer and distributor of food and animal feed products, we are
subject to the Federal Food, Drug and Cosmetic Act and regulations issued
thereunder by the Food and Drug Administration ("FDA"). This regulatory scheme
governs the manufacture (including composition and ingredients), labeling,
packaging, and safety of food. The FDA regulates manufacturing practices for
foods through its good manufacturing practices regulations, specifies the
standards of identity for certain foods and animal feed and prescribes the
format and content of certain information required to appear on food and animal
feed product labels. In addition, the FDA enforces the Public Health Service Act
and regulations issued thereunder, which authorize regulatory activity necessary
to prevent the introduction, transmission or spread of communicable diseases. We
and our products are also subject to state and local regulation through
mechanisms such as the licensing of dairy manufacturing facilities, enforcement
by state and local health agencies of state standards for food products,
inspection of facilities and regulation of trade practices. Modification of
these Federal, state and local laws and regulations could increase our costs of
sales or prevent us from marketing foods in the way we currently do and could
have a material adverse effect on our business prospects, results of operations
and financial condition.

Pasteurization of milk and milk products is also subject to inspection by
the United States Department of Agriculture. We and our products are also
subject to state and local regulation through mechanisms such as the licensing
of dairy manufacturing facilities, enforcement by state and local health
agencies of state standards for food products, inspection of facilities, and
regulation of trade practices in connection with the sale of food products.
Modification of these Federal, state and local laws and regulations could
increase our costs of sales or prevent us from marketing foods in the way we
currently do and could have a material adverse effect on our business prospects,
results of operations and financial condition.

Land O'Lakes Farmland Feed distributes animal feed products through a
network of independent dealers. Various states in which these dealers are
located have enacted dealer protection laws which could have the effect of
limiting our rights to terminate dealers. In addition, failure to comply with
such laws could result in awards of damages or statutory sanctions. As a result,
it may be difficult to modify the way we distribute our feed products, which may
put us at a competitive disadvantage.

Several states have enacted "corporate farming laws" that restrict the
ability of corporations to engage in farming activities. Minnesota, North
Dakota, South Dakota, Nebraska, Kansas, Oklahoma, Missouri, Iowa and Wisconsin,
states in which we conduct business, have corporate farming laws. We believe
that our operations currently comply with the corporate farming laws in these
states and their exemptions, but these laws could change in the future and

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additional states could enact corporate farming laws that regulate our
businesses. Even with the exemptions, these corporate farming laws restrict our
ability to expand or alter our operations in these states.

ITEM 2. PROPERTIES.

We own the land underlying our corporate headquarters in Arden Hills,
Minnesota and lease the buildings. Our corporate headquarters, consisting of a
main office building and a research and development facility, has an aggregate
of approximately 275,000 gross square feet. In addition, we own offices,
manufacturing plants, storage warehouses and facilities for use in our various
business segments. Thirty-three of our owned properties are mortgaged to secure
our indebtedness. The following table provides summary information about our
principal facilities:

(1) Includes a closed facility and a facility utilized for feed manufacturing
which is accounted for in the dairy foods segment.

(2) The Midwest region includes the states of Ohio, Michigan, Indiana, Illinois,
Wisconsin, Minnesota, Iowa, Missouri, Oklahoma, Kansas, Nebraska, South
Dakota and North Dakota and Ontario, Canada.

(3) The West region includes the states of Montana, Wyoming, Colorado, Texas,
New Mexico, Arizona, Utah, Idaho, Washington, Oregon, Nevada, California,
Alaska and Hawaii.

(4) The East region includes the states of Maine, New Hampshire, Vermont, New
York, Massachusetts, Rhode Island, Connecticut, Pennsylvania, New Jersey,
Delaware and Maryland.

(5) The South region includes the states of West Virginia, Virginia, North
Carolina, Kentucky, Tennessee, South Carolina, Georgia, Florida, Alabama,
Mississippi, Louisiana and Arkansas.

(6) Includes 12 closed facilities and 2 research and development facilities.

(7) Includes 4 facilities which will be sold upon completion of construction.

We do not believe that we will have difficulty in renewing the leases we
currently have or in finding alternative space in the event those leases are not
renewed. We consider our properties suitable and adequate for the conduct of our
business.

ITEM 3. LEGAL PROCEEDINGS.

We are currently and from time to time involved in litigation incidental to
the conduct of our business. The damages claimed against us in some of these
cases are substantial. Although the amount of liability that may result from
these matters cannot be ascertained, we do not currently believe that, in the
aggregate, they will result in liabilities material to our consolidated
financial condition, future results of operations or cash flow.

In December 2002, we reached settlements with additional defendants against
whom we claimed had illegally fixed the prices of various vitamin products we
purchased. As a result of these settlements, we received net proceeds of
approximately $87 million in January 2003. When combined with the settlement
proceeds received from similar claims settled since the commencement of these
actions, we have received cumulatively approximately $140 million from the
settling defendants. We continue to pursue similar claims against several other
defendants. With respect to the remaining claims, which represent significantly
less than half of the disputed vitamin purchases, we anticipate a Minnesota
trial during the fall of 2003.

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In a letter dated January 18, 2001, we were identified by the United States
Environmental Protection Agency ("EPA") as a potentially responsible party for
the hazardous waste located at the Hudson Refinery Superfund Site in Cushing,
Oklahoma. The letter invited us to enter into negotiations with the EPA for the
performance of a remedial investigation and feasibility study in connection with
the site and also demanded that we reimburse the EPA approximately $8.9 million
for remediation expenses already incurred at the site. We have responded to the
EPA denying any responsibility. No further communication has been received from
the EPA.

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

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

There is no established public market for the common equity of Land
O'Lakes. In view of the following, it is unlikely in the foreseeable future that
a public market for these securities will develop:

(1) the common stock interests are nondividend bearing;

(2) the right of any holder of common stock to receive patronage
income depends on the quantity and value of the business the member conducts
with us (See "Item 1. Business - Description of the Cooperative - Patronage
Income and Equity");

(3) the class of common stock issued to a member depends on whether
the member is a cooperative or individual member and whether the member is a
"dairy member" or "ag member" (See "Item 1. Business - Description of the
Cooperative - Our Structure and Membership");

(4) we may redeem holdings of members under certain circumstances upon
the approval of our board of directors (See "Item 1. Business - Description of
the Cooperative - Patronage Income and Equity"); and

(5) our board of directors may terminate a membership if it determines
that the member has failed to adequately patronize us or has become our
competitor (See "Item 1. Business - Description of the Cooperative - Our
Structure and Membership").

As of December 31, 2002, there are approximately 1,127 holders of Class
A common stock, 5,207 holders of Class B common stock, 194 holders of Class C
common stock and 1,105 holders of Class D common stock.

ITEM 6. SELECTED FINANCIAL DATA.

SELECTED LAND O'LAKES CONSOLIDATED HISTORICAL FINANCIAL DATA

The historical consolidated financial information presented below has been
derived from the Land O'Lakes consolidated financial statements for the periods
indicated. They should be read together with the audited consolidated financial
statements of Land O'Lakes and the related notes included elsewhere in the
Annual Report on Form 10-K. You should read the selected consolidated historical
financial information along with "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our financial statements
included in this Annual Report on Form 10-K.

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See accompanying Notes to Selected Land O'Lakes Historical Financial Data.

21

See accompanying Notes to Selected Land O'Lakes Historical Financial Data.

22

NOTES TO SELECTED LAND O'LAKES HISTORICAL FINANCIAL DATA

(1) The following table summarizes restructuring and impairment charges
(reversals):

In 2002, we recorded restructuring and impairment charges of $31.4
million. In our Dairy Foods segment, we recorded a $19.6 million
restructuring and impairment charge in 2002, of which $15.2 million was
related primarily to the write-down of impaired plant assets held for sale
to their estimated fair value, and $4.4 million was related to employee
severance and outplacement costs for 374 employees at various locations.
In our Animal Feed segment, we recorded an $11.8 million restructuring and
impairment charge, of which $3.1 million was primarily related to the
write-down of impaired plant assets held for sale to their estimated fair
value, and $8.7 million was related to employee severance and outplacement
costs for 375 employees at various locations.

In 2001, we recorded restructuring charges of ($4.1) million. Our dairy
foods segment recorded a restructuring charge of $1.7 million, which had
not been paid at December 31, 2001, for severance costs for 63 production
employees resulting from the consolidation of production facilities. Our
animal feed segment reversed $5.7 million of a prior year restructuring
charge primarily due to the decision we made following the acquisition of
Purina Mills to continue to operate plants that were held for sale at
December 31, 2000. The impairment charge of $7.8 in 2001 included $6.0
million related to our investment in a Mexican feed operation held for
sale at December 31, 2001. We recorded this impairment charge in order to
value the investment at its expected selling price less costs of disposal.
In addition, our swine segment recorded an impairment charge of $1.8
million to reduce undeveloped land with permit issues to its estimated
fair value.

In 2000, we recorded restructuring charges of $9.7 million resulting from
the consolidation of facilities and reduced personnel at Land O'Lakes
Farmland Feed. Of the $9.7 million, $7.2 million related to the closing
and planned sale of 12 plants and consisted of $5.5 million to write down
the book value of the plants and $1.7 million for demolition and
environmental clean-up. The remaining $2.5 million represented severance
and outplacement costs for 119 non-plant employees. The impairment charge
of $44.5 million in 2000 resulted primarily from a write-down of goodwill
related to a previous acquisition.

In 1999, the impairment charge of $3.9 million was related to
under-utilization of the Land O'Lakes cheese production assets in Poland.

(2) In 2002, we recognized gain on legal settlements of $155.5 million. The
gain resulted from net cash proceeds of $58.8 million and a legal
settlement receivable of $96.7 million for which cash was received on
January 17, 2003. The amounts were received from several vitamin product
suppliers against whom we alleged certain price-fixing claims.

(3) In 2002, we recorded a $4.2 million gain on the sale of a customer list
pertaining to the feed phosphate distribution business.

(4) In 2002, we divested our operations in Poland for $4.2 million in cash and
$6.3 million in debt assumed, which resulted in a gain of $1.3 million.
Net cash proceeds were $11.0 million from a divestiture of a seed coating
business in Idaho and a seed inoculation business in Brazil, which
resulted in a gain of $4.0 million. Other divestures in 2002 resulted in
net cash proceeds of $0.9 million and a loss of $0.3 million. In April
2000, we divested swine assets in North Carolina for net proceeds of $4.4
million, resulting in a gain of $0.5 million. In July 2000, we sold our
fluid dairy assets for $179.7 million, resulting in a gain of $88.5
million. In November 1999, we sold our flavoring business for $75.9
million in cash, resulting in a gain of $54.2 million.

(5) EBITDA is defined as earnings before income taxes, gains or losses on
extinguishment of debt, interest expense (net of interest income),
depreciation and amortization (excluding amortization of credit facilities
included in interest expense), equity in earnings or loss of affiliated
companies, gain or loss from divestiture of

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businesses, minority interest, cash dividends from affiliated companies,
and the other items described below. EBITDA is presented because it is a
widely accepted financial indicator of a company's ability to incur and
service indebtedness. EBITDA should not be considered an alternative to
net sales in excess of expenses as a measure of our operating results or
to cash flow as a measure of liquidity. In addition, although EBITDA is
not recognized under generally accepted accounting principles, it is
widely used as a general measure of a company's performance because it
assists in comparing performance on a relatively consistent basis across
companies without regard to depreciation and amortization, which can vary
significantly depending on accounting methods (particularly where
acquisitions are involved) or nonoperating factors such as historical cost
basis. Because EBITDA is not calculated identically by all companies, the
presentation herein may not be comparable to other similarly titled
measures of other companies. The definition of EBITDA conforms to that
which is included in the indenture for our 8-3/4% senior notes due 2011.

Other items excluded from EBITDA are:

(a) Reflects non-cash expense for mark-to-market derivative contracts
incurred as a result of adopting SFAS No. 133 in 2001. See "Item 7.
Management's Discussion and Analysis of Financial Condition and
Results of Operation."

(b) Reflects cash gain resulting from the sale of an intangible asset in
2002 and the sale of certain swine assets in 2001.

(c) See Note 1.

(d) Reflects exclusion of earnings of unrestricted subsidiaries as
required by the definition of EBITDA included in the indenture for
our 8-3/4% senior notes due 2011.

(6) Period results include an inventory write-down of $62.1 million for cheese
and butter due to lower of cost or market adjustments.

(7) Reflects the portion of earnings allocated to members for the prior fiscal
year distributed in cash in the current fiscal year.

(8) Reflects the distribution of earnings previously allocated to members and
not paid out as cash patronage. The years 2002, 2001, 2000 and 1999
include the distribution of a portion of the equity issued in connection
with the acquisition of Dairyman's Cooperative Creamery Association and
acquisition of certain assets of Countrymark Cooperative.

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(9) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as earnings before income taxes, plus fixed charges.
Fixed charges include interest on all indebtedness and one-third of rental
expense on operating leases representing that portion of rental expense
deemed to be attributable to interest.

(10) Working capital is defined as current assets (less cash and cash
equivalents) minus current liabilities (less notes and short-term
obligations, and current maturities of long-term debt).

(11) Total debt excludes the 7.45% Capital Securities due on March 15, 2028, of
our trust subsidiary.

(12) On October 1, 2000, we combined our feed assets with those of Farmland
Industries to form Land O'Lakes Farmland Feed. We consolidate the
operating activities of Land O'Lakes Farmland Feed.

(13) Historically, Purina Mills reported results of its swine business together
with its feed business. Accordingly, the portion of our swine business
which we acquired from Purina Mills is reported in our animal feed segment
results for the years ended December 31, 2002 and 2001.

(14) On July 28, 2000, we contributed all of our revenue generating agronomy
assets (excluding our investment in CF Industries and assets held for
sale) to Agriliance, a joint venture with United Country Brands, in
exchange for a 50% interest in Agriliance. Beginning July 29, 2000, our
share of earnings or losses in Agriliance was reported under the equity
method of accounting.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

You should read the following discussions of financial condition and results
of operations together with the consolidated financial statements and the notes
to such statements included elsewhere in this Annual Report on Form 10-K. This
discussion contains forward-looking statements based on current expectations,
assumptions, estimates and projections of our management. These forward-looking
statements involve risks and uncertainties. Actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, as more fully described in the "Risk Factors" section
and elsewhere in this Annual Report on Form 10-K. We undertake no obligation to
update publicly any forward-looking statements.

OVERVIEW

GENERAL

Segments

We operate our business predominantly in the United States in five segments:
dairy foods, animal feed, crop seed, swine and agronomy. We have limited
international operations, certain of which have recently been sold or are in the
process of being sold. Our dairy foods segment produces, markets and sells
butter, spreads, cheese and other dairy products. We operate our animal feed
segment principally through Land O'Lakes Farmland Feed LLC, our 92% owned joint
venture with Farmland Industries, Inc. ("Farmland Industries"). Our animal feed
segment develops, produces, markets and distributes animal feed to both
commercial and lifestyle customers. The results of the animal feed business are
consolidated in our financial statements and the minority interest is
eliminated. As a result of the Purina Mills acquisition in October 2001, animal
feed results now include Purina Mills swine marketing activities since Purina
Mills historically reported results of its swine business together with its feed
business. Our crop seed segment sells seed for a variety of crops, including
alfalfa, corn, soybeans and forage and turf grasses. Our swine segment produces
and markets both young feeder pigs and mature market hogs. Our agronomy segment
distributes crop nutrient and crop protection products. Historically, our
agronomy segment consisted primarily of the assets we contributed to Agriliance,
LLC ("Agriliance"), our unconsolidated joint venture. Since the contribution of
those assets to Agriliance at the end of July 2000, our investment has been
accounted for on the equity method

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through our agronomy segment, along with the agronomy assets we retained. Our
membership interest in CF Industries, Inc. ("CF Industries"), an inter-regional
plant food manufacturing cooperative, is accounted for through this segment on a
cost basis. We also derive a portion of revenues and income from other related
businesses, which are insignificant to our overall results. We allocate
corporate administration expense to all five of our business segments using two
methodologies; direct usage for services for which we are able to track this
usage, such as payroll and legal, and invested capital for all other expenses. A
majority of these costs is allocated based on direct usage. We allocate these
costs to segments whether or not they are solely composed of investments and
joint ventures.

Unconsolidated Businesses

We have investments in certain entities that are not consolidated in our
financial statements. In 2002, income from our unconsolidated businesses
amounted to $22.7 million, compared to income of $48.6 million in 2001 and a
loss of $35.6 million in 2000. Our investment in unconsolidated businesses as of
December 31, 2002 was $545.6 million, compared to $568.1 million as of December
31, 2001 and $465.8 million as of December 31, 2000. Cash flow from our
investment in unconsolidated businesses in 2002 was $27.4 million, compared to
$5.4 million in 2001 and $25.4 million in 2000.

Agriliance and CF Industries constitute the most significant of our
investments in unconsolidated businesses, both of which are reflected in our
agronomy results. Our investment in, and earnings from, Agriliance and CF
Industries were as follows as of and for the year ended: