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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x      Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended November 30, 2010

Commission file number:  33-83868

AMERICAN CRYSTAL SUGAR COMPANY

(Exact name of registrant as specified in its charter)

101 North Third Street

Moorhead, Minnesota  56560

(Address of principal executive offices)

Telephone Number (218) 236-4400

(Registrant’s telephone number, including area code)

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, and (2) has been subject to such filing requirements for the past 90 days. YES x NO o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

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

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AMERICAN CRYSTAL SUGAR COMPANY

FORM 10-Q

INDEX

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American Crystal Sugar Company

Consolidated Balance Sheets

(Unaudited)

(In Thousands)

Assets

The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.

* Derived from audited financial statements

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American Crystal Sugar Company

Consolidated Balance Sheets

(Unaudited)

(In Thousands)

Liabilities and Members’ Investments

The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.

* Derived from audited financial statements

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American Crystal Sugar Company

Consolidated Statements of Operations

(Unaudited)

(In Thousands)

The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.

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American Crystal Sugar Company

Consolidated Statements of Cash Flows

(Unaudited)

(In Thousands)

Non-Cash Investing Activities: Purchases of Property and Equipment include the changes in accounts payable related to these purchases of ($8,280,000) and ($5,686,000) for the three months ended November 30, 2010 and 2009, respectively.

The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.

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AMERICAN CRYSTAL SUGAR COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED

November 30, 2010 and 2009

(Unaudited)

Note 1:  Basis of Presentation

The unaudited consolidated financial statements of American Crystal Sugar Company (Company) contained herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.  Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America. However, in the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included.  These financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended August 31, 2010.

The Company’s consolidated financial statements are comprised of: American Crystal Sugar Company; its wholly-owned subsidiaries Sidney Sugars Incorporated (Sidney Sugars) and Crab Creek Sugar Company (Crab Creek); and ProGold Limited Liability Company (ProGold), a limited liability company in which the Company holds a 51 percent ownership interest. All material inter-company transactions have been eliminated.

The operating results for the three months ended November 30, 2010, are not necessarily indicative of the results that may be expected for the year ended August 31, 2011.  The amount paid to shareholders for sugarbeets (member beet payment) depends on the future selling prices of sugar and agri-products as well as processing and other costs incurred during the remainder of the fiscal year associated with the 2010 Red River Valley sugarbeet crop (RRV crop).  The amount paid to non-member growers for sugarbeets (non-member beet payment) depends on the future selling prices of sugar and the related selling expenses associated with the 2010 Sidney Sugars sugarbeet crop (Sidney crop).  For the purposes of this report, the amount of the beet payments, future revenues and costs have been estimated.  Therefore, adjustments with respect to these estimates may be necessary in the future, as additional information becomes available.

Note 2: Recently Issued Accounting Pronouncements

In June and December 2009, the FASB issued authoritative guidance to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement in transferred financial assets. This guidance was adopted by the Company in the first quarter of fiscal 2011 and had no material effect on the Company’s financial statements.

In June and December 2009, the FASB issued authoritative guidance to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. This guidance was adopted by the Company in the first quarter of fiscal 2011 and had no material effect on the Company’s financial statements.

In October 2009, the FASB issued an update to the authoritative guidance which contains amendments to the criteria for separating consideration in multiple-deliverable arrangements and expands disclosures related to such arrangements.  This guidance was adopted by the Company in the first quarter of fiscal 2011 and had no material effect on the Company’s financial statements.

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In January 2010, the FASB issued an update to the authoritative guidance which contains amendments and clarification to the guidance related to the disclosures involving recurring or nonrecurring fair value measurements. The new disclosures and clarifications became effective and were adopted by the Company in the third quarter of fiscal 2010 except for the disclosures about purchases, sales, issuances and settlements in the roll forward activity in Level 3 fair value measurements which becomes effective for the Company in the first quarter of fiscal 2012. The Company does not expect that the adoption of this guidance will have a material effect on the Company’s financial statements.

In July 2010, the FASB issued an update to the authoritative guidance to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables.  The guidance provided by this update becomes effective for the Company in the second quarter of fiscal 2011. The Company does not expect that the adoption of this guidance will have a material effect on the Company’s financial statements.

In December 2010, the FASB issued an update to the authoritative guidance which modifies Step one of the goodwill impairment test for reporting units with zero or negative carrying amounts. The guidance provided by this update becomes effective for the Company in the third quarter of fiscal 2011. The Company does not expect that the adoption of this guidance will have a material effect on the Company’s financial statements.

Note 3:  Inventories

The major components of inventories are as follows (In Thousands):

Sugar, pulp, molasses and other agri-products inventories are valued at estimated net realizable value.  Unprocessed sugarbeets are valued at the estimated gross beet payment. Maintenance parts and supplies and sugarbeet seed inventories are valued at the lower of average cost or market.

Note 4: Short-Term Debt

The Company has a seasonal line of credit through June 1, 2011 with a consortium of lenders led by CoBank, ACB of $400.0 million.  On June 1, 2011, the seasonal line of credit with this consortium of lenders is reduced to $320.0 million and is available through July 30, 2012. The Company also has a line of credit with Wells Fargo Bank for $1.0 million. The Company’s commercial paper program provides short-term borrowings of up to $320.0 million.  Any borrowings under the commercial paper program along with outstanding short-term letters of credit will act to reduce the available credit under the CoBank, ACB seasonal line of credit by a commensurate amount.

The Company can also utilize the Commodity Credit Corporation (CCC) to meet its short-term borrowing needs.  The Company can borrow funds on a non-recourse basis from the CCC, with repayment of such funds secured by sugar.  The limitations on such borrowings are based on the amount of the Company’s sugar inventory and certain loan covenant restrictions by CoBank, ACB.  As of November 30, 2010, the Company had the capacity to obtain non-recourse loans from the CCC of approximately $220.8 million.

As of November 30, 2010, the Company had outstanding commercial paper of $298.1 million at average interest rates of .42% to .55% and maturity dates between December 1, 2010 and January 31, 2011.  The Company had no outstanding short-term debt with CoBank, ACB, Wells Fargo Bank or the

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CCC as of November 30, 2010. The Company had $2.7 million of short-term letters of credit outstanding as of November 30, 2010.  The unused seasonal line of credit as of November 30, 2010 was $100.2 million.

As of November 30, 2009, the Company had a seasonal line of credit through July 30, 2012, with a consortium of lenders led by CoBank, ACB of $320.0 million and a line of credit with Wells Fargo Bank for $1.0 million.  The Company’s commercial paper program provided short-term borrowings of up to $320.0 million.  Any borrowings under the commercial paper program along with outstanding short-term letters of credit will act to reduce the available credit under the CoBank, ACB seasonal line of credit by a commensurate amount.  The Company had outstanding commercial paper as of November 30, 2009 of $190.5 million at average interest rates of .40% to .65% and maturity dates between December 1, 2009 and February 26, 2010.  The Company had no outstanding short-term debt with CoBank, ACB, Wells Fargo Bank or the CCC as of November 30, 2009.  The Company had $2.9 million of short-term letters of credit outstanding as of November 30, 2009.  The unused seasonal line of credit as of November 30, 2009 was $127.6 million.

Note 5:  Long-Term Debt

The Company has a long-term debt line of credit through July 30, 2015, with CoBank, ACB of $132.1 million, of which $21.3 million in loans and $69.8 million in long-term letters of credit were outstanding as of November 30, 2010.  The unused long-term line of credit as of November 30, 2010, was $41.0 million.  In addition, the Company had long-term debt outstanding, as of November 30, 2010, of $50 million from a private placement of Senior Notes that occurred in September of 1998 and $69.8 million from five separate issuances of Pollution Control and Industrial Development Revenue Bonds.

As of November 30, 2009, the Company had a long-term debt line of credit through December 31, 2011, with CoBank, ACB of $174.6 million, of which $40.3 million in loans and $70.8 million in long-term letters of credit were outstanding.  The unused long-term line of credit as of November 30, 2009, was $63.5 million.  In addition, the Company had long-term debt outstanding, as of November 30, 2009, of $50 million from a private placement of Senior Notes that occurred in September of 1998; $ .7 million from a private placement of Senior Notes that occurred in January of 2003; and $70.1 million from five separate issuances of Pollution Control and Industrial Development Revenue Bonds.

Note 6:  Interest Paid and Interest Capitalized

Interest paid, net of amounts capitalized, was $1.3 million and $1.2 million for the three months ended November 30, 2010 and 2009, respectively.  Interest capitalized was $ .1 million in each of the three months ended November 30, 2010 and 2009.

Note 7:  Derivative Instruments and Hedging Activities

The Company, as a result of its operating and financing activities, is exposed to changes in foreign currency exchange rates and interest rates which may adversely affect its results of operations and financial position.  In seeking to minimize the risks and/or costs associated with such activities, the Company may enter into derivative contracts.

The Company manages its foreign currency related risks primarily through the use of foreign currency forward contracts. The contracts held by the Company are denominated in Euros. The Company has entered into foreign currency forward contracts that are designated as cash flow hedges of exchange rate risk related to foreign currency-denominated purchases of equipment.  Inputs used to measure the fair value of the foreign currency forward contracts are contained within level 1 of the fair value hierarchy.  At November 30, 2010, the Company had no foreign currency forward contract cash flow hedges.  At November 30, 2009, the Company had foreign currency forward contract cash flow hedges for approximately 496,000 Euros with maturity dates of January 22, 2010 to October 15, 2010.  At November 30, 2009, the fair value of the open contracts reflected a gain of approximately $23,000 recorded in accumulated other comprehensive income/(loss) in members’ equity.  Amounts deferred to accumulated

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other comprehensive income/(loss) are reclassified into the cost of the equipment when the actual purchase takes place.

The Company is exposed to interest risk primarily through its borrowing activities.  On December 24, 2009, the Company entered into an interest rate swap contract associated with a $27.3 million Industrial Development Revenue Bond issue that matures on September 1, 2019.  The interest rate swap contract requires payment of a fixed interest rate of 2.827 % and the receipt of a variable rate of interest based on the Securities Industry and Financial Market Association (SIFMA) index of .276 % as of November 30, 2010 on $27.3 million of indebtedness. The Company has designated this interest rate swap contract as a cash flow hedge.  Inputs used to measure the fair value of the interest rate swap contracts are contained within level 2 of the fair value hierarchy.  As of November 30, 2010, the fair value of the cash flow hedge reflected a loss of approximately $1.4 million recorded in accumulated other comprehensive income/(loss) and will be reclassified to interest expense over the life of the swap contract. No ineffectiveness was recognized in earnings during the quarter ended November 30, 2010.  The current period loss of $170,000 is classified as interest expense on the statements of operations.  As of November 30, 2010, $602,000 of deferred net losses on the interest rate swap contract contained in accumulated other comprehensive income/(loss) are expected to be reclassified to earnings during the next 12 months.

Note 8:  Accrued Continuing Costs

For interim reporting, the net proceeds from member business is based on the forecasted gross beet payment and the percentage of the tons of sugarbeets processed to the total estimated tons of sugarbeets to be processed for a given crop year.  The net proceeds from the operations of Sidney Sugars is based on the forecasted net income for the fiscal year and the percentage of the tons of non-member sugarbeets processed to the total estimated tons of non-member sugarbeets to be processed for a given fiscal year.

Accrued continuing costs represent the difference between the net proceeds as determined above and actual member business crop year and Sidney Sugars fiscal year revenues realized and expenses incurred through the end of the reporting period.  Accrued continuing costs are reflected in the Consolidated Financial Statements as a cost on the Consolidated Statements of Operations and as a current liability on the Consolidated Balance Sheets.

Note 9:  Net Periodic Pension and Post-Retirement Costs

The following schedules provide the components of the Net Periodic Pension and Post-Retirement Costs for the three months ended November 30, 2010 and 2009:

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Components of Net Periodic Pension Cost

(In Thousands)

Components of Net Periodic Post-Retirement Cost

(In Thousands)

The Company did not make any contributions to the pension plans during the three months ended November 30, 2010 but is anticipating making contributions of approximately $10.0 million to the pension plans during the remainder of this fiscal year.  The Company has contributed and made benefit payments of approximately $17,000 related to the Supplemental Executive Retirement Plans during the three months ended November 30, 2010.  The Company expects to contribute and make benefit payments totaling approximately $99,000 this fiscal year related to the Supplemental Executive Retirement Plans.

The Company has contributed and made benefit payments of approximately $323,000 related to the post-retirement plans during the three months ended November 30, 2010.  The Company expects to contribute and make benefit payments of approximately $1.0 million related to the post-retirement plans during the current fiscal year.

Note 10:  Members’ Investments

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Note 11: Shipping and Handling Costs

The costs incurred for the shipping and handling of products sold are classified in the financial statements as a selling expense on the Statements of Operations.  Shipping and handling costs were $43.6 million and $40.5 million for the three months ended November 30, 2010 and 2009, respectively.

Note 12: Segment Reporting

The Company has identified two reportable segments: Sugar and Leasing.  The sugar segment is engaged primarily in the production and marketing of sugar from sugarbeets.  It also sells agri-products and sugarbeet seed.  The leasing segment is engaged in the leasing of a corn wet-milling plant used in the production of high-fructose corn syrup sweetener.  The segments are managed separately.  There are no inter-segment sales.  The leasing segment has a major customer that accounts for all of that segment’s revenue.

Summarized financial information concerning the Company’s reportable segments for the three months ended November 30, 2010 and 2009, is shown below:

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Note 13: Fair Value of Financial Instruments

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Quoted market prices are generally not available for the Company’s financial instruments.  Fair values are based on judgments regarding anticipated cash flows, future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors.  These estimates involve uncertainties and matters of judgment, and therefore, cannot be determined with precision.  Changes in assumptions could significantly affect the estimates.

Long-Term Debt, Inclusive of Current Maturities - Based upon discounted cash flows and current borrowing rates with similar maturities, the fair value of the long-term debt as of November 30, 2010 was approximately $145.1 million in comparison to the carrying value of $141.1 million. The fair value of the long-term debt as of November 30, 2009 was approximately $161.2 million in comparison to the carrying value of $161.1 million.

Investments in CoBank, ACB and Investments in Marketing Cooperatives - The Company believes it is not practical to estimate the fair value of these investments without incurring excessive costs because there is no established market for these securities and equity interests, and it is inappropriate to estimate future cash flows which are largely dependent on future earnings of these organizations.

Foreign Currency Forward Contracts — There were no open foreign currency forward contracts as of November 30, 2010.  Based on a variety of pricing factors, which include the market price of the foreign currency forward contract available in the dealer-market, the fair value of the open contracts as of November 30, 2009 was an asset of approximately $23,000. Inputs used to measure the fair value of the foreign currency forward contracts are quoted prices in active markets for identical assets or liabilities and therefore are contained within level 1 of the fair value hierarchy. See the tables below.

Interest Rate Contracts — Based on the zero coupon method in which the term, notional amount, and repricing date of the interest rate swap match the term, repricing date, and principal amount of the interest-bearing liability on which the hedging interest payments are due, the fair value of the interest rate contract as of November 30, 2010 was a liability of approximately $1.4 million. There were no interest rate contracts as of November 30, 2009.  Inputs used to measure the fair value of the interest rate swap contracts are quoted prices in active markets for similar assets or liabilities and therefore are contained within level 2 of the fair value hierarchy. See the tables below.

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The tables below reflect the assets and liabilities measured at fair value on a recurring basis as of November 30, 2010 and 2009.

Note 14: Environmental Matters

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

The Company’s sugar manufacturing process is energy intensive and generates carbon dioxide and other “Greenhouse Gases” (GHGs). Several bills have been passed or introduced in the United States Senate and House of Representatives that would regulate GHGs and carbon dioxide emissions to reduce the impact of global climate change.  The Company believes it is likely that industries generating GHGs, including the Company, will be subject to either federal or state regulation relating to climate change policies in the relatively near future.  These policies, if adopted, will increase the Company’s energy and other operating costs.  Depending on how these policies address imports, the domestic sugar market may have a competitive disadvantage compared with imported sugar.  These policies could have a significant negative impact on the Company’s beet payment to shareholders if the Company is not able to pass the increased costs on to the Company’s customers.

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

Including the expenditures related to the MPCA stipulation agreement, the Company has identified capital expenditures for environmental related projects over the next three years at the Company’s factory locations of approximately $10.7 million.

Note 15: Legal Matters

On September 21, 2009 the U.S. District Court (District Court) ruled against the U.S. Department of Agriculture (USDA) finding that the USDA violated federal law by failing to prepare an Environmental Impact Statement (EIS) before deregulating Roundup Ready® sugarbeets.  On January 19, 2010, a motion was filed in Federal Court seeking a preliminary injunction to halt the planting and processing of Roundup Ready® sugarbeets for both the seed and root crops.  On March 16, 2010 the U.S. District Court denied the plaintiffs’ request for the preliminary injunction.

Following the August 13, 2010 District Court hearing on interim remedies, the District Court issued a ruling confirming the ability of the shareholders to harvest the 2010 root crop even though it was produced primarily from Roundup Ready® sugarbeet seed.  In addition, the District Court immediately vacated the original decision by USDA to deregulate the use of Roundup Ready® sugarbeet seed. As a result, the planting of Roundup Ready® sugarbeet seed after August 13, 2010 is prohibited until further

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action is taken by USDA in accordance with applicable law to allow planting of Roundup Ready® sugarbeet seed.  It is impractical to speculate on the likelihood of the USDA taking action prior to the planting of the 2011 sugarbeet crop.  Given the recent ruling, and the uncertain timing of USDA action, it is possible that the Company’s shareholders may not be able to plant Roundup Ready® sugarbeets in 2011.  The ability of shareholders to plant Roundup Ready® sugarbeets in subsequent years will be determined as a final matter based on the outcome of the EIS and further decision by USDA.  The number of years required to complete the EIS is uncertain.

Note 16: Subsequent Events

The Company has evaluated events through the date that the financial statements were issued for potential recognition or disclosure in the November 30, 2010 financial statements.

On December 16, 2010, the Company closed a bond issuance for $15.0 million.  The City of Moorhead, Minnesota (the Issuer) issued the Recovery Zone Facility Revenue Bonds (American Crystal Sugar Company Project) Series 2010 in the principal amount of $15.0 million (the Bonds).  Proceeds of the Bonds will be used by the Company to construct a tower diffuser and associated enclosure at the Company’s sugar beet processing facility in Moorhead, Minnesota. The principal amount of the Bonds of $3.0 million is due on June 1, 2024 and the remaining principal amount of the bonds is due in equal payments of $4.0 million each on June 1 of the subsequent three years.  The Bonds carry fixed interest rates of 5.35% and 5.65%.  Interest on the Bonds is payable semiannually on each June 1 and December 1, commencing June 1, 2011. The Bonds are rated “BBB+” by Standard & Poor’s Ratings Service.

On January 5, 2011, the Company’s Board of Directors authorized the revolvement of $29.6 million of unit retains for distribution on January 6, 2011.

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Three Months Ended November 30, 2010 and 2009

This report contains forward-looking statements that involve risks and uncertainties.  Such forward-looking statements include, among others, those statements including the words “expect”, “anticipate”, “believe”, “may” and similar expressions.  The Company’s actual results could differ materially from those indicated.  Risk factors that could cause or contribute to such differences include, without limitation, market factors, weather and general economic conditions, farm and trade policy, and available quantity and quality of sugarbeets.  For a more complete discussion of “Risk Factors”, please refer to the Company’s 2010 Form 10-K.

OVERVIEW

The harvest of the Red River Valley and the Sidney sugarbeet crops grown during 2010 and to be processed during fiscal 2011 produced a total of 11.7 million tons of sugarbeets, or approximately 26.4 tons of sugarbeets per acre from approximately 445,000 acres. This represents an increase in total tons harvested of approximately 11.9 percent compared to the 2009 crop. The sugar content of the 2010 crop is 18.0 percent as compared to the 16.7 percent sugar content of the 2009 crop. The Company expects to produce a total of approximately 33.8 million hundredweight of sugar from the 2010 crop, an increase of approximately 16.4 percent compared to the 2009 crop.

Net proceeds attributable to American Crystal Sugar Company for fiscal 2011 is expected to be approximately 19 percent higher than in fiscal 2010.  This expected increase is primarily due to increased tons harvested and an increase in the sugar content of the sugarbeets resulting in the increased production of sugar and agri-products. Also contributing to this expected increase are higher anticipated net selling prices for sugar. These anticipated increases will be partially offset by anticipated higher operating costs.

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RESULTS OF OPERATIONS

Comparison of the Three Months Ended November 30, 2010 and 2009

Revenue for the three months ended November 30, 2010, was $352.0 million, an increase of $32.6 million from the three months ended November 30, 2009.  The table below reflects the percentage changes in product revenues, prices and volumes for the three months ended November 30, 2010, as compared to the three months ended November 30, 2009.

The increases in selling prices for sugar and betaine reflect strong markets due to supply and demand factors. The decrease in the selling price of pulp, molasses and CSB is the result of lower prices for competing alternative products in the marketplace. The increase in the volume of pulp, molasses and CSB sold reflects the impact of more product availability due to an earlier startup this year as compared to the previous year.

Rental revenue on the ProGold operating lease was $5.8 million and $6.4 million for the three months ended November 30, 2010 and 2009, respectively.

Cost of sales for the three months ended November 30, 2010, exclusive of payments to members for sugarbeets, decreased $113.2 million as compared to the three months ended November 30, 2009. This decrease was primarily related to the following:

·                  At the end of each reporting period, product inventories are recorded at their net realizable value. The change in the net realizable value of the product inventories from the beginning of the reporting period is recorded on the balance sheet as either an increase or decrease to inventories with a corresponding dollar for dollar adjustment to cost of sales on the statement of operations. The increase in the net realizable value of product inventories for the three months ended November 30, 2010 was $196.3 million as compared to an increase of $65.5 million for the previous three months ended November 30, 2009 resulting in a $130.8 million favorable change in the cost of sales between the two years as shown in the table below:

Change in the Net Realizable Value of Product Inventories

(1) The change is primarily due to a 22.6 percent decrease in the hundredweight of sugar inventory as of August 31, 2010 as compared to August 31, 2009 partially offset by an 11.3 percent increase in the per hundredweight net realizable value of sugar inventory as of August 31, 2010 as compared to August 31, 2009; a 35.4 percent decrease in the tons of pulp inventory as of August 31, 2010 as compared to August 31, 2009; a 47.3 percent decrease in the per ton net realizable value of pulp inventory as of August 31, 2010 as compared to August 31, 2009; and a 35.4 percent decrease in the per ton net realizable value of molasses as of August 31, 2010 as compared to August 31, 2009 partially offset by a 10.7 percent increase in the tons of molasses inventory as of August 31, 2010 as compared to August 31, 2009.

(2) The change is primarily due to a 35.4 percent increase in the hundredweight of sugar inventory as of November 30, 2010 as compared to November 30, 2009 and a 20.1 percent increase in the per hundredweight net realizable value of sugar as of November 30, 2010 compared to November 30, 2009.

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·                  Factory operating costs increased $10.3 million for the three months ended November 30, 2010, as compared to the three months ended November 30, 2009 primarily due to an increase in the tons harvested and processed this year. These increases were partially offset by higher grower freight reimbursements resulting from an increase in tons harvested this year.

·                  The cost recognized associated with the non-member sugarbeets increased $4.0 million for the three months ended November 30, 2010, when compared to the three months ended November 30, 2009.  This increase was primarily due to an increase in the projected per ton sugarbeet payment for the Sidney crop this year.

·                  Due to low sugar inventory levels at the beginning of fiscal 2011, the Company’s sugar marketing agent, United Sugars Corporation, purchased and sold additional sugar to meet our customers’ needs during the first quarter of fiscal 2011.  As a result, the costs associated with purchased sugar were $3.4 million higher for the three months ended November 30, 2010, as compared to the three months ended November 30, 2009.

Selling, general and administrative expenses increased $3.6 million for the three months ended November 30, 2010, as compared to the three months ended November 30, 2009.  Selling expenses increased $3.0 million primarily due to an increase in freight and handling costs associated with increased volumes of agri-products sold. General and administrative expenses increased $ .5 million due to general cost increases.

Net proceeds attributable to American Crystal Sugar Company increased $112.6 million for the three months ended November 30, 2010, as compared to the three months ended November 30, 2009. This increase was primarily due to more tons processed, higher sugar content of the sugarbeets and increased sugar selling prices.

LIQUIDITY AND CAPITAL RESOURCES

Under the Company’s agreement with its shareholders, payments for member-delivered sugarbeets for each crop year are calculated based on the revenues from sugar and agri-products derived from the sugarbeet crop less all member business expenses.  In addition, the beet payments made to member growers and non-member growers are paid in three payments over the course of a year, and the member payments are made net of any anticipated unit retain for the crop.  These procedures have the effect of providing the Company with an additional source of short-term capital.

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

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

The Company has a seasonal line of credit through June 1, 2011 with a consortium of lenders led by CoBank, ACB of $400.0 million, against which there was no outstanding balance as of November 30, 2010.  On June 1, 2011, the seasonal line of credit with this consortium of lenders is reduced to $320.0 million and is available through July 30, 2012. The Company also has a line of credit with Wells Fargo Bank for $1.0 million, against which there was no outstanding balance as of November 30, 2010.  The Company’s commercial paper program provides short-term borrowings of up to $320 million of which approximately $298.1 million was outstanding as of November 30, 2010.  The Company had $2.7 million of short-term letters of credit outstanding as of November 30, 2010.  Any borrowings under the commercial paper program along with outstanding short-term letters of credit will act to reduce the available credit under the CoBank, ACB seasonal line of credit by a commensurate amount.  The unused short-term line of credit as of November 30, 2010, was $100.2 million.

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Under the Farm Bill, the Company can borrow funds on a non-recourse basis from the CCC, with repayment of such funds secured by sugar.  The limitations on such borrowings are based on the amount of the Company’s sugar inventory and certain loan covenant restrictions by CoBank, ACB.  As of November 30, 2010, the Company had the capacity to obtain non-recourse loans from the CCC of approximately $220.8 million. The Company has not utilized the CCC during fiscal 2011.

The Company also has a long-term debt line of credit through July 30, 2015, with CoBank, ACB of $132.1 million, of which $21.3 million in loans and $69.8 million in long-term letters of credit were outstanding as of November 30, 2010.  The unused long-term line of credit as of November 30, 2010, was $41.0 million.  In addition, the Company had long-term debt outstanding, as of November 30, 2010, of $50 million from a private placement of Senior Notes that occurred in September of 1998 and $69.8 million from five separate issuances of Pollution Control and Industrial Development Revenue Bonds.

On December 16, 2010, the Company closed a bond issuance for $15.0 million.  The City of Moorhead, Minnesota (the Issuer) issued the Recovery Zone Facility Revenue Bonds (American Crystal Sugar Company Project) Series 2010 in the principal amount of $15.0 million (the Bonds).  Proceeds of the Bonds will be used by the Company to construct a tower diffuser and associated enclosure at the Company’s sugar beet processing facility in Moorhead, Minnesota. The principal amount of the Bonds of $3.0 million is due on June 1, 2024 and the remaining principal amount of the bonds is due in equal payments of $4.0 million each on June 1 of the subsequent three years.  The Bonds carry fixed interest rates of 5.35% and 5.65%.  Interest on the Bonds is payable semiannually on each June 1 and December 1, commencing June 1, 2011. The Bonds are rated “BBB+” by Standard & Poor’s Ratings Service.

The Company had outstanding purchase commitments totaling $19.9 million as of November 30, 2010, for equipment and construction contracts related to various capital projects.

As of November 30, 2010, Midwest had outstanding short-term debt with CoBank, ACB of $6.0 million, of which $3.4 million was guaranteed by the Company.

The net cash used in operations was $266.3 million for the three months ended November 30, 2010, as compared to $126.4 million for the three months ended November 30, 2009.  This increase in cash used of $139.9 million was primarily the result of the following:

·                  Reflected in the change in the net cash used in operating activities is a net cash increase of $ .2 million from the prior year which was the result of increased revenue of $32.5 million and a decrease in costs of $80.4 million partially offset by an increase in the member gross beet payment of $112.7 million.

·                  There was a net unfavorable change in assets and liabilities from the prior year of $140.1 million primarily comprised of the following:

·                  The decrease in cash related to receivables of $14.1 million is primarily due to the timing of the deliveries of products and collections.

·                  The decrease in cash related to the change in inventories of $213.6 million was primarily due to an increase in finished product inventories related to more sugar on hand and an increased net realizable value per hundredweight of sugar partially offset by a decreased net realizable value per ton of pulp, CSB and molasses and a decrease in the inventories of pulp, CSB and molasses.

·                  The decrease in cash related to changes in other liabilities of $7.5 million and the increases of cash of $3.2 million related to non-current pension asset/liabilities and $2.0 million related to accounts payable are due to the timing of payments.

·                  The increase in cash related to changes in advances to related parties of $6.3 million was primarily due to the timing of the cash requirements of our marketing agents.

·                  The increase in cash related to changes in accrued continuing costs of $30.0 million was the result of the differences in the timing of revenues and expenses between the two years.

·                  The increase in cash related to the Amount Due Growers of $53.3 million was due to a larger accrued grower payment this year of $213.8 million resulting from an increase in tons harvested and an increased forecasted per ton grower payment. This was partially offset by increased payments to growers of $160.5 million during the three months ended November 30, 2010 as compared to the three months ended November 30, 2009.

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The net cash used in investing activities was $24.1 million for the three months ended November 30, 2010, as compared to $14.8 million for the year ended November 30, 2009.  The increase of $9.3 million was primarily due to increased purchases of property and equipment.

The net cash provided by financing activities was $290.4 million for the three months ended November 30, 2010, as compared to $141.2 million for the three months ended November 30, 2009. This increase of $149.2 million was primarily due to increased proceeds from short- term debt of $148.6 million.

On January 5, 2011, the Company’s Board of Directors authorized the revolvement of $29.6 million of unit retains for distribution on January 6, 2011.

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

OTHER

Environmental

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

The Company’s sugar manufacturing process is energy intensive and generates carbon dioxide and other “Greenhouse Gases” (GHGs). Several bills have been passed or introduced in the United States Senate and House of Representatives that would regulate GHGs and carbon dioxide emissions to reduce the impact of global climate change.  The Company believes it is likely that industries generating GHGs, including the Company, will be subject to either federal or state regulation relating to climate change policies in the relatively near future.  These policies, if adopted, will increase the Company’s energy and other operating costs.  Depending on how these policies address imports, the domestic sugar market may have a competitive disadvantage compared with imported sugar.  These policies could have a significant negative impact on the Company’s beet payment to shareholders if the Company is not able to pass the increased costs on to the Company’s customers.

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