SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
---------

[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended May 31, 1997 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: 333-17865

HARVEST STATES COOPERATIVES
(Exact name of registrant as specified in its charter)

MINNESOTA 41-0251095
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)

P.O. Box 64594
St. Paul, Minnesota 55164
(Address of principal executive office)
Registrant's Telephone number, including area code: (612) 646-9433

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 the 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

State the aggregate market value of the voting stock held by non-affiliates of
the registrant: The registrant has no voting stock outstanding.

Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: The registrant has no common
stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

No documents are incorporated by reference.

INDEX

PAGE
PART I. NO.
---

Item I. Business
Grain Merchandising..........................................................
Oilseed Processing and Refining Defined Business Unit........................
Wheat Milling Defined Business Unit..........................................
Farm Marketing and Supply....................................................
Feed.........................................................................
Services.....................................................................
Membership in the Company and Authorized Capital.............................
Item 2. Properties...........................................................
Item 3. Legal Proceedings....................................................
Item 4. Submission of Matters to a Vote of Security Holders..................

PART II.

Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters......................................................................
Item 6. Selected Financial Data
Consolidated Company.........................................................
Oilseed Processing and Refining Defined Business Unit........................
Wheat Milling Defined Business Unit..........................................
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation
Consolidated Company.........................................................
Oilseed Processing and Refining Defined Business Unit........................
Wheat Milling Defined Business Unit..........................................
Item 8. Financial Statements and Supplementary Data .........................
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.........................................................

PART III.

Item 10 Directors and Executive Officers of the Registrant
Board of Directors...........................................................
Executive Officers...........................................................
Item 11. Executive Compensation..............................................
Item 12. Security Ownership of Certain Beneficial Owners and Management......
Item 13. Certain Relationships and Related Transactions......................

PART IV.

Item 14. Exhibits, Financial Statements and Reports on Form 8-K..............

SUPPLEMENTAL INFORMATION.....................................................

SIGNATURES...................................................................

PART I.

ITEM 1. BUSINESS

THE COMPANY

Harvest States Cooperatives (the "Company") is an agricultural
cooperative. Its primary business is merchandising grain, which involves
purchase of various grains from its Individual Members, Affiliated Associations
and others, sale of the grain to users, exporters and other intermediaries and
arranging for the transportation and storage of purchased grain for delivery to
buyers. The Company also sells feed and other farm supplies to its Individual
Members and others, offers services to its Individual Members and Affiliated
Associations, crushes and refines soybeans, through a joint venture participates
in the food processing and packaging business and mills

wheat.

The Company has authorized three classes of membership: Individual
Members ("Individual Members"), Affiliated Associations ("Affiliated
Associations) and Defined Members ("Defined Members"). Individual Members are
producers of agricultural products who have done business with the Company
during its last fiscal year and have consented to take patronage into account as
contemplated by Section 1388 of the Internal Revenue Code. In the patronage
consent filed with the Company, the producer agrees to include both the cash and
noncash portion of any patronage refund in taxable income for federal income tax
purposes. Affiliated Associations are associations of producers of agricultural
products complying with certain federal requirements which have done at least
$100,000 of business with the Company during its last fiscal year and have
consented to take patronage into account for tax purposes. Defined Members are
persons otherwise eligible for membership who hold Equity Participation Units.

Individual Members, Defined Members and Affiliated Associations who
sell grain to the Company, and Individual Members, Defined Members and
Affiliated Associations and consenting patrons who purchase goods and services
from the Company are entitled to receive patronage refunds from the Company,
which are declared on an annual basis. The Company may also allocate
non-member-sourced income to its Members and Non-Member Consenting Patrons in
proportion to patronage.

The Board of Directors created the Oilseed Processing and Refining
Defined Business Unit for the purpose of purchasing soybeans and crude soybean
oil and the processing and sale thereof into meal, flour, oil and various
byproducts, effective at the close of business on May 31, 1997, to carry on the
operations of the Processing and Refining Division. On that date there was
allocated to the Oilseed Processing and Refining Defined Business Unit the
assets and liabilities, including commitments, contingencies and obligations,
appropriately belonging to the Division. In connection with the organization of
the Oilseed Processing and Refining Defined Business Unit, the Company has
withdrawn an amount sufficient to bring its net worth to $53,390,998, which was
its net worth on May 31, 1996.

The Board of Directors created the Wheat Milling Defined Business Unit
for the purpose of purchasing wheat (including durum) and the processing and
sale thereof into flour and various byproducts, effective at the close of
business on May 31, 1997, to carry on the operations of the Milling Division. On
that date there was allocated to the Wheat Milling Defined Business Unit the
assets and liabilities, including commitments, contingencies and obligations,
appropriately belonging to the Division. In connection with the organization of
the Wheat Milling Defined Business Unit, the Company contributed additional
capital so that the construction of the Pocono facility could be financed from
equity capital.

GRAIN MERCHANDISING

Grain and oilseed merchandising involves the sale and distribution of
grain and oilseeds from producer to processor, to be processed for human and
animal consumption and other uses. These commodities are produced and consumed
throughout the world. Increased worldwide demand is generated through population
growth and, for certain regions, increased per capita food consumption supported

by growing affluence. Demand for these commodities is satisfied by worldwide
production, which is in part determined by prevailing prices.

A significant portion of high production grains (wheat, corn and
soybeans) grown domestically have been exported. United States production
competes with production in numerous other countries to supply the worldwide
demand for these grains. The ability of producers in particular countries to
compete on a worldwide basis may be enhanced by governmental support and
protection, though this activity has been declining in recent years. Wheat, corn
and soybean exports from the U.S. are projected to increase in the crop year
ending May 31, 1998. United States wheat exports are projected to increase from
27.2 million metric tons (MMT) in 1997 to 30 MMT in 1998. The U.S. continues to
face competition from Canada, Australia, Argentina and the European Union (EU);
however, collectively these countries are projected to reduce their exports from
78.5 MMT in 1997 to 69.8 MMT in 1998 due to production shortfalls. United States
corn exports are projected to increase from 45.7 MMT in 1997 to 52.1 MMT in
1998. Argentina, the largest competitor of the U.S., is projected to reduce its
exports from 14.7 MMT in 1997 to 13 MMT in 1998. Also, world corn production is
expected to be down from 590 MMT in 1997 to 572 MMT in 1998, which should create
increased demand for U.S. corn. United States soybean exports are projected to
increase from 23.95 MMT in 1997 to 25.72 MMT in 1998. Argentina and Brazil, the
major competitors for U.S. exports, are projected to have unchanged exports for
1998 versus 1997. The U.S. gain in exports is projected to come from demand from
China. The Company expects that its export business will increase consistent
with the increase in U.S. exports. Historical information and projections for
the 1997 and 1998 crop years are from information published by the United States
Department of Agriculture.

Imports of grains into the U.S. consist mainly of wheat, oats and
barley. The amounts imported have not had a material effect on grain
merchandising.

In the United States, grain merchandising involves the purchase of
grain, sale for export or further domestic use and storage and transportation to
export facilities or to users.

Grain merchandising may be adversely affected by supply and demand
relationships, both domestic and international. Supply is affected by weather
conditions, disease, insect damage, acreage planted, government regulation and
policies and commodity price levels. The business is also affected by
transportation conditions, including rail, vessel, barge and truck. Demand may
be affected by foreign governments and their programs, relationships of foreign
countries with the United States, the affluence of foreign countries, acts of
war, currency exchange fluctuations and substitution of commodities. Demand may
also be affected by changes in eating habits, by population growth and increased
or decreased per capita consumption of some products.

Recent Developments. High grain and oilseed prices in the years ended
May 31, 1996 and 1997 promoted increased production and resulted in larger
inventories held by producers at May 31, 1997. Prices for most grains and
oilseeds are at or near three year lows due to the increased supplies. The
following table shows the cash prices per

bushel for the major grains on June 1, 1996 and May 31, 1997:

June 1, May 31,
Grain 1996 1997
----- ------- ------------
Wheats $6.49 $3.91
Corn 4.69 2.51
Soybeans 7.51 6.98

Because the profitability of the Company is primarily determined by margins,
changes in grain prices do not directly impact the Company's income. However,
grain prices may be reflective of the demand for grain (particularly grain to be
exported) and therefore give an indication of the grain volume the Company may
handle within a crop year.

The Freedom to Farm Act of 1996, enacted in April 1996, has had a
profound effect on the production patterns within the United States. The
flexibility of the program allows producers to grow crops which provide the
highest financial return. For example, this year the U.S. producer reacted to
short supplies and high prices of soybeans in the year ended May 31, 1997 with a
tremendous increase in acreage for the year ended May 31, 1998. U.S. export
subsidies, principally the Export Enhancement Program, continue to decline in
importance and overall use.

The Company's operations depend more on the volume of grain handled
than the price of grain. In addition, the price of grain should have little
effect on either the Wheat Milling or Oilseed Processing and Refining Defined
Business Units, which are more dependent on manufacturing margins.

Introduction

The Company buys grain through its Grain Marketing Division from
Affiliated Associations (typically a cooperative organization of local
producers), directly from Individual Members (to a limited extent) and from
third parties (such as grain dealers, non-Member producers, marketing
associations or marketing pools, elevators and other grain merchandising
companies) and through its Agri-Service Centers, which are country elevators
owned by the Company, directly from Individual Members. Grain purchased by
Agri-Service Centers is usually sold to the Grain Marketing Division for resale.
A small portion of grain is handled on a consignment basis.

Grain is sold by the Company for future delivery at a specified
location. Grain sold by a producer is typically trucked to a local elevator for
sale. From local elevators, grain may be transported in a variety of ways to the
purchaser. The Company arranges transportation to delivery locations using
truck, rail and barge transportation. Grain intended for export may be shipped
by rail to an export terminal or to a barge loading facility to be shipped by
barge to an export terminal, where it is loaded on an ocean-going vessel. Grain
intended for domestic use may be shipped by truck or rail to various locations
throughout the United States. Because of its facilities, the Company has
significant capacity to sell grain for export.

Purchases. The number of bushels of grain purchased from Individual
Members and Affiliated Associations, the total grain purchased and the
percentage relationship for each of the years ended May 31 are set forth below:

Years Ended May 31,
-------------------
1997 1996 1995
---- ---- ----

Member purchases 757,704,610 959,166,596 720,024,458
Total purchases 1,280,557,384 1,692,438,700 1,148,952,019
Percentage 59.2% 56.7% 62.7%

Substantially all of the grain purchased by the Company is grown in the Midwest,
Great Plains and Pacific Northwest. The Company also purchases grain grown in
other parts of the United States and other countries.

Grains Handled. The primary grains merchandised by the Company are
corn, wheat and soybeans. The Company also merchandises barley, milo, sunflowers
and oats as well as smaller quantities of canola, flax, rye, millet and others.

The number of bushels of grain purchased by the Company for the periods
indicated is set forth below:

Years Ended May 31,
-------------------
1997 1996 1995
------------- ------------- -------------

Wheat ...... 478,978,426 505,606,729 457,684,648
Corn ....... 425,851,278 777,631,466 342,832,256
Soybeans ... 219,686,914 234,930,247 172,025,373
Barley ..... 61,839,145 75,225,773 93,699,078
Milo ....... 51,722,961 48,199,610 36,663,822
Sunflowers . 14,603,180 25,952,855 28,929,026
Oats ....... 22,487,231 20,008,442 13,423,696
All other .. 5,388,249 4,883,578 3,694,120
------------- ------------- -------------
1,280,557,384 1,692,438,700 1,148,952,019
============= ============= =============

Sales of grain by the Company for each of the years ended May 31 are
set forth below:

1997 1996 1995
-------------- -------------- --------------
Wheat ... $2,490,328,502 $2,631,202,689 $1,890,923,540
Corn .... 1,558,440,294 2,518,939,007 954,570,208
Soybeans 1,421,789,252 1,431,485,630 880,627,929
All other 565,944,576 545,596,081 465,543,859
-------------- -------------- --------------
TOTAL ... $6,036,502,624 $7,127,223,407 $4,191,665,536
============== ============== ==============

Recent Developments. United States grain exports declined in the year
ended May 31, 1997 to a three year low for wheat, soybeans and corn (96.9
million metric tons). In the year ended May 31, 1998, exports are projected to
rebound to 107.7 million metric tons for the same three commodity groups. The
U.S. will produce a large portion of the exportable supplies in the world as the
major export competitors are experiencing production shortfalls. As a result,
the Company expects that its own export handle of these commodities will
increase with a potential increase in overall volume handled of 5 to 10% in the
year ending May 31, 1998. Historical information and projections for the 1997
and 1998 crop years are from information published by the United States
Department of Agriculture.

Merchandising

The Company buys and sells grain through offices of its Grain Marketing
Division located in Portland, Oregon, Great Falls, Montana, Lincoln, Nebraska,
Kansas City, Kansas, St. Paul, Minnesota, Winona, Minnesota, Davenport, Iowa,
and at its Agri-Service Centers.

Grain purchased through Agri-Service Centers is purchased on a cash and
futures basis. Grain purchased through the Grain Marketing Division is usually
purchased for future delivery.

Grain is sold for future delivery at a specified location, with the
Company usually responsible for arranging necessary transportation to that
location. Purchasers include millers, malters, exporters and foreign buyers as
well as the soybean, wheat and feed operations of the Company. The Company is
not dependent on any one customer. The Company has supply relationships calling
for delivery of grain at prevailing market prices. Grain users store varying
amounts of grain for their own use.

The Company's ability to arrange transportation is a significant part
of the service it offers to its customers. The Company's loading capabilities
onto unit trains, ocean going vessels and barges is a component of the selling
price of grain handled by the Company. Rail transportation is through
independent railroads, although approximately 30% of rail movement for Grain
Merchandising for the year ended May 31, 1997, was carried out through leased
railcars (either directly or by use of pools in which such leased railcars
participate). Vessel and truck transportation is carried out exclusively by
third parties. Barge transportation is carried out by third parties, but the
Company is a party to long-term affreightment agreements for approximately 20%
of

current needs.

Virtually all grain sold domestically is sold by employees while
approximately half of grain exported is sold by brokers or agents and the
balance by employees. The Company has a small ownership position in Intrade, a
company which owns part of a Germany-based marketing organization involved in
trading grain and feedstuffs in Germany and international markets. The Company
also has relationships with agents, brokers and marketing companies in other
countries to assist it in export sales.

Competition

The Company competes for both the purchase and sale of grain.
Competition is intense and margins are low. Some of the Company's competitors
are integrated food producers, which may also be customers. Many competitors
have substantially greater financial resources than the Company.

In the purchase of grain from producers, location of a delivery
facility is a prime consideration but producers are willing to truck grain for
sale over increasingly longer distances. Grain prices are affected by reported
trading prices on national markets, shipping costs and storage capabilities.
Price is affected by the capabilities of the facility. For example, if it is
cheaper to deliver to a customer by unit train than by truck, a facility with
unit train capability provides a price advantage. The Company believes that its
relationship with Individual Members serviced by local Agri-Service Centers and
with Affiliated Associations gives it a broad origination capability.

The Company competes in the sale of grain based on price and its
ability to provide quantity and quality of grains required and its ability to
deliver. Location of facilities is a major factor in ability to compete. Major
grain merchandising companies in addition to the Company include
Archer-Daniels-Midland, Cargill, Continental, ConAgra, Bunge and Louis Dreyfus,
each of which handles grain volumes of more than one billion bushels annually.
The Company estimates it would be among the smaller merchandisers among these
seven. The Company also competes with numerous other grain merchandisers with
annual volumes of less than one billion bushels.

Since the Company's facilities are located primarily in the Midwest,
Great Plains and Pacific Northwest, with a terminal in the Gulf, the Company
primarily competes with the companies whose facilities are in these areas. The
Company's export facilities in three major areas allow it to ship to anyplace in
the world.

Grain Handling and Transportation

The Company owns export terminals, river terminals and other elevators
involved in the handling of grain. All such facilities can receive inbound truck
and rail. Export facilities on river systems can receive grain by barge. In
addition, the Company owns 154 Agri-Service Centers, which are country elevators
which receive grain from producers.

The Company operates river terminals at Kansas City, Missouri (two),

St. Paul, Savage and Winona, Minnesota, and Davenport, Iowa (two), which are
used to load grain onto barges for shipment to both domestic and export
customers via the Mississippi River system, on trucks for domestic markets and
on rail for both domestic and export markets. The Company owns and operates a
terminal at Kennewick, Washington, on the Columbia River. The Company has
interests in three river terminals located on the Snake River: Lewis and Clark
Terminal Association's facility located at Lewiston, Idaho, Central Ferry
Terminal Association's facility located at Central Ferry, Washington and
Co-Grain Elevator Company's facilities located at Upper Monumental and Burbank,
Washington. Much of the grain from these terminals is loaded onto barges for
shipment to Pacific Northwest export terminals.

The Company's export terminal at Superior, Wisconsin, provides access
to the Great Lakes and St. Lawrence Seaway, and the Company's export terminal at
Myrtle Grove, Louisiana, serves the Gulf market. An export terminal at Kalama,
Washington, leased by the Company, and an export terminal at Vancouver,
Washington, owned by a joint venture partner, serve the Pacific market. A
partnership between the Company and Continental Grain Company operates an export
terminal at Tacoma, Washington, for feed grain and oilseed shipments to Pacific
Rim customers. A facility in Spokane, Washington is used for storage and
transloading. An elevator in Petersburg, North Dakota, is used to standardize
barley for a particular customer.

The Division leases a fleet of covered hopper cars and enters into
various contracts for covered grain barges. In addition, at various times the
Company may charter vessels.

Price Risk and Hedging

Upon purchase, the Company has risks of carrying grain, including price
changes and performance risks (including delivery, quality, quantity and
shipment period), depending upon the type of purchase contract entered into.
These contracts include flat price, basis fixed, delayed price, deferred
payment, hedge to arrive and futures fixed. The Company is exposed to risk of
loss in the market value of positions held, consisting of grain inventory and
purchase contracts at a fixed or partially fixed price, in the event market
prices decrease. The Company is also exposed to risk of loss on its fixed price
or partially fixed price sales contracts in the event market prices increase.

To reduce the price change risks associated with holding fixed price
positions, the Company generally takes opposite and offsetting positions by
entering into grain commodity futures contracts (either a straight futures
contract or an options futures contract) on regulated commodity futures
exchanges. Most of the grain volume handled by the Company can be hedged. Some
grains cannot be hedged because there are no futures for certain commodities.
For those commodities, risk is managed through the use of forward sales and
different pricing arrangements and to some extent cross-commodity futures
hedging. While hedging activities reduce the risk of loss from changing market
values of grain, such activities also limit the gain potential which otherwise
could result from changes in market prices of grain. The Company's policy is to
generally maintain hedged positions in grain which is hedgeable, but the Company
can be long or short at any time. The Grain Marketing Division's profitability
is primarily derived from margins on grain merchandised and revenues generated
from other merchandising activities with its customers, not from hedging

transactions. Hedging arrangements do not protect against nonperformance of a
contract.

When a futures contract is entered into, an initial margin deposit must
be sent to the applicable exchange. The amount of the deposit is set by the
exchange and varies by commodity. If the market price of a short futures
contract increases, then an additional margin deposit (maintenance margin) would
be required. Similarly, if the price of a long futures contract decreases, a
maintenance margin deposit would be required to be sent to the applicable
exchange. Subsequent price changes could require additional maintenance margins
or could result in the return of maintenance margins.

At any one time the Grain Marketing Division's inventory and purchase
contracts for delivery to the Company may be substantial. The Grain Marketing
Group has a risk management policy and procedures that include net position
limits. It is defined by commodity and includes both trader and management
limits. This policy and computerized procedure triggers a review by management
of the Grain Marketing Division when any trader is outside of position limits
and also triggers review by management of the Company if the Grain Marketing
Division is outside of its position limits. The position limits are reviewed at
least annually with management of the Company. The Company monitors current
market conditions and may expand or reduce the purchasing program in response to
changes in those conditions. In addition, certain purchase and sale contracts
are subject to credit approvals and appropriate terms and conditions.

Seasonality

Harvest for most crops occurs in the summer and fall, and the Company
purchases more grain during that period. Because of the Company's geographic
location and the fact that it is further from its export facilities, grain tends
to be sold later than in other parts of the country. Because many producers have
significant on-farm storage capacity and because of the Company's own storage
capacity, grain is bought and moved throughout the year.

Working Capital

Due to the amount of grain purchased and held in inventory, the Company
has significant working capital needs at various times of the year. The amount
of borrowings for this purpose and the interest rate charged on such borrowings
directly affect the profitability of the grain merchandising operations.

Employees

As of May 31, 1997, the Grain Marketing Division had 458 employees, of
which 81 were traders, 243 production staff, 14 management and 120 support
staff. See "Farm Marketing and Supply" with respect to employment by
Agri-Service Centers. Of these employees, 149 at five locations are subject to
collective bargaining agreements expiring at various times through 1999.

OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT

The soybean crushing industry converts soybeans into meal used for
feeding animals, soy flour used for specialty food and other purposes and crude
soybean oil. The soybean refining industry refines the crude oil for use in
processed foods, such as margarine, salad dressings and baked goods, and to a
more limited extent industrial uses. Soybean production is concentrated in the
central United States, Brazil, China and Argentina. Crushing plants are
generally located in proximity to sources of soybeans and usage of meal often
arises in proximity to crushing plants. Refineries are generally located next to
the crushing plants. Oil is shipped throughout the United States and for export.

Per capita domestic consumption of soybean oil has declined slightly in
recent years. Exports of soybean oil are variable but generally a minor portion
of total production. In recent years, exports have varied widely, which
dramatically influenced margins in both crushing and refining.

Usage of meal is dependent on the amount of livestock being raised,
which has increased in recent years. While per capita domestic consumption of
meat has been stable in recent years, demand for meal has increased due to an
increase in the domestic consumption of pork and poultry and an increase in meat
exports. Soybean meal provides a ready source of protein with a 44% or higher
protein content, compared to corn at 9%, wheat at 9.5% and barley at 11.5%

Major competitors in the industry include the Company,
Archer-Daniels-Midland (ADM), Cargill, Ag Processing, Inc. ("AGP"), Central Soya
and Bunge. Competition is driven by price, transportation costs, service and
product quality. The industry is highly competitive. These and other competitors
are adding new plants and expanding capacity of existing plants. Unless exports
increase or existing refineries are closed, this extra capacity is likely to put
additional pressure on prices and erode margins. Several competitors operate
over various market segments and may be suppliers to or customers of other
competitors.

Historically, in the Company's trade area there has been an adequate
supply of soybeans, even in years when there has been a substantial amount of
soybeans exported. While the price of soybeans has fluctuated substantially, the
prices of meal and oil have followed, so that margins have been maintained. The
amount of soybeans held in inventory domestically at the end of the 1997 crop
year (at August 31, 1997) is the lowest in 20 years.

At its integrated crushing and refining facility in Mankato, Minnesota,
the Oilseed Processing and Refining Defined Business Unit processes soybeans
into soybean meal, soyflour and crude soybean oil. The crude soybean oil, with
additional purchased crude oil, is refined.

Equity Participation Units

At May 31, 1997, Equity Participation Units in the Oilseed Processing
and Refining Defined Business Unit represented the right to deliver 1,074,000
bushels of soybeans, approximately 3% of the processing capacity of the Defined
Business Unit.

Price Risk and Hedging

To reduce the price change risks associated with holding fixed price
commodity positions, the Company generally takes opposite and offsetting
positions by entering into commodity futures contracts (either a straight

futures contract or an options futures contract) on regulated commodity futures
exchanges. While hedging activities reduce the risk of loss from changing market
values of oilseeds, such activities also limit the gain potential which
otherwise could result from changes in market prices of oilseeds. The Company's
policy is to generally maintain hedged positions, but the Company can be long or
short at any time. The Defined Business Unit's profitability is primarily
derived from margins on oilseeds processed, not from hedging transactions.
Management does not anticipate that its hedging activity will have a significant
impact on future operating results or liquidity. Hedging arrangements do not
protect against nonperformance of a contract.

At any one time the Defined Business Unit's inventory and purchase
contracts for delivery to the Defined Business Unit may be substantial. The
Defined Business Unit has a risk management policy and procedures that includes
net position limits. It is defined by commodity and includes both trader and
management limits. This policy and computerized procedure triggers a review by
management of the Defined Business Unit when any trader is outside of position
limits and also triggers review by management of the Company if the Defined
Business Unit is outside of its position limits. The position limits are
reviewed at least annually with management of the Company. The Defined Business
Unit monitors current market conditions and may expand or reduce the purchasing
program in response to changes in those conditions. In addition, certain
purchase and sale contracts are subject to credit approvals and appropriate
terms and conditions.

Supply

The Oilseed Processing and Refining Defined Business Unit purchases
virtually all of the soybeans processed by it from Members. The balance is
purchased in the commercial marketplace. Because the Oilseed Processing and
Refining Defined Business Unit has not had long-term contracts with customers,
it does not obligate itself to purchase soybeans based on orders received from
customers but instead on its contemplation of future production. The Oilseed
Processing and Refining Defined Business Unit does not hold significant
inventories of raw beans; capacity for raw bean storage is approximately three
to four weeks of production. At any one time, inventories of beans and contracts
for future delivery represent two to ten weeks of requirements. Inventories of
raw beans and contracted purchases for future delivery are substantially hedged.

The Oilseed Processing and Refining Defined Business Unit also
purchases crude soybean oil for processing at its refinery. Approximately 40% of
the crude oil refined is produced by the Oilseed Processing and Refining Defined
Business Unit, and the balance is purchased. Major suppliers have been AGP and
ADM. Because ADM is opening a refinery late in 1997 in Minnesota, it will no
longer be a major supplier of crude oil. However, there are several producers of
crude oil, and the Company believes it will be able to replace this supply
source. The refining facility has storage capacity for approximately 10 days'
supply of crude oil, so it depends on a steady supply of crude oil to supplement
its own output of crude oil to maintain constant production. It typically
commits for several months' supply, to be priced prior to delivery.

As with other agricultural commodities, the availability and price of
soybeans fluctuate with forces of supply and demand. The Oilseed Processing and
Refining Defined Business Unit has never experienced a supply shortage of
soybeans.

Customers

Refined Oils. The Oilseed Processing and Refining Defined Business Unit
sells refined oil throughout most of the United States although it concentrates
on customers located in Minnesota, Wisconsin, North Dakota, South Dakota,
northern Iowa and northern Illinois, which can be reached by truck rather than
rail and are therefore slightly more profitable. Customers in these states
accounted for more than 50% of refined oil sales in the year ended May 31, 1997.
The Company estimates that of oil sold, 25% is used for margarine, 15 to 20% for
salad dressing and smaller percentages for snack foods, baked goods, imitation
cheese goods, processed potato goods and others. Approximately 5% of oil sales
are for industrial use. During the year ended May 31, 1997, the Oilseed
Processing and Refining Defined Business Unit had over 100 customers, the
largest of which was Ventura Foods and its predecessor operations described in
the next paragraph. One other customer was responsible for over 10% of refined
oil sales by the Defined Business Unit. Sales of refined oil are made by Defined
Business Unit employees and to a lesser extent by brokers.

The Company has a long-term supply agreement with Ventura Foods, LLC.
which commenced January 1, 1997 and will continue for 15 years or longer if the
Company continues to hold at least a 25.5% interest in Ventura Foods. The
Company has agreed to supply and Ventura has agreed to purchase a minimum
quantity of soybean salad oil, hydrogenated soybean oil and other edible oils
which the Company may refine during the term of the agreement. The Company has
agreed to sell to Ventura Foods, and Ventura Foods has agreed to purchase from
the Company, during each calendar year at least 430,000,000 pounds of products
or 50% of its requirements if greater, but not more than 100% of its
requirements. The price for the products sold to Ventura Foods is a formula
adjusted annually to be competitive with alternative sources.

Soybean Meal. Soybean meal sold by the Oilseed Processing and Refining
Defined Business Unit is used for feeding livestock. During the year ended May
31, 1997, the Defined Business Unit sold meal to over 500 customers, primarily
feed lots and feed mills. During the year ended May 31, 1997, ten customers
accounted for approximately 55% of meal sold, and two customers, which would be
difficult to replace, accounted for approximately 34% of meal sold. For the year
ended May 31, 1997, 55% of meal was sold in Minnesota, 25% in Wisconsin, 13% in
Canada and the balance in Iowa, North Dakota, South Dakota and Montana. These
sales could be adversely affected by a decline in the livestock or turkey
industries in these areas. Substantially all meal sales are made directly by
employees of the Defined Business Unit.

Soyflour. Soyflour is used in the baking industry, as milk replacers in
animal feed and in industrial applications. Sales of soyflour have not been
significant relative to sales of meal.

Dependence on Customers. Other than Ventura Foods, only one additional
customer accounted for more than 10% of the Oilseed Processing and Refining
Defined Business Unit's sales in the year ended May 31, 1997.

Competition

The Company believes that the Oilseed Processing and Refining Defined
Business Unit has 6 to 8% of the refined soybean oil market and less than 3% of
the soybean crushing capacity.

Processing

Soybeans arriving by truck or rail are sampled, weighed, dumped and
unloaded into bean storage. When brought out of storage, beans are cleaned,
dehulled, cracked and conditioned and are compressed into flakes. Oil is removed
from the flakes through a solvent process. Flakes are then further processed
into soyflour or soymeal. Soymeal can be made into animal feed at various
protein levels.

Crude oil is filtered to remove remaining meal particles and
centrifuged to separate out trace constituents. The oil can be sold as an
industrial product used in plastics, inks and paints. Further processing
prepares the oil for food use, by bleaching with a special clay to remove trace
metals, chlorophyll and other impurities to make salad oil. By adding hydrogen
under pressure to bleached oil, the Company makes partially hydrogenated soybean
oil which may be used in products such as shortenings or margarines. To remove
unwanted odors, flavors and mild color constituents, bleached or hydrogenated
oil is heated under vacuum. The result is a product that is flavorless,
odorless, tasteless and virtually clear.

While the Oilseed Processing and Refining Defined Business Unit runs at
between 80 to 100% of capacity throughout the year, volume is typically higher
at harvest time since soybean supplies are more abundant in the fall. Producer
and cooperative elevator storage capabilities allow suppliers to sell for
delivery throughout the year.

Facilities

The Oilseed Processing and Refining Defined Business Unit has one
facility located in Mankato, Minnesota, comprised of a crushing plant, a
refinery, a soyflour plant and self contained utilities. A quality control lab
with technically sophisticated equipment assures high quality standards.

The Defined Business Unit expects to expend approximately $14 to $24
million over the two years ending May 31, 1999, to expand the capacity of its
crushing plant, to increase processing efficiency and to meet environmental
requirements. The Company expects that such construction will be financed from
long-term borrowings.

Employees

The Oilseed Processing and Refining Defined Business Unit currently
employs 202 employees, 34 in the office in administration, sales and support
service and 168 in the plant. Certain production workers are subject to
collective bargaining

agreements with the American Federation of Grain Millers (131 employees)
expiring in 1998 and the Pipefitters' Union (2 employees) expiring in 1997.

Ventura Foods

On August 30, 1996, the Company and Wilsey Foods, Inc. combined the
assets and certain liabilities of the Company's Holsum Foods Consumer Products
Packaging Division with the assets and liabilities of Wilsey Foods, Inc. as
Ventura Foods, LLC ("Ventura Foods"). A joint venture owned by Wilsey Foods,
Inc. and the Company which operated a manufacturing facility in Chambersburg,
Pennsylvania, was merged into Ventura Foods. The Company owns 40% and Wilsey
Foods owns 60% of the equity and rights to distribution of profits of Ventura
Foods. The Company's total net investment in Ventura Foods was $38,491,000 as of
August 30, 1996.

Sales by the Oilseed Processing and Refining Defined Business Unit to
Ventura Foods and its predecessors in interest are shown below:

Oilseed Processing and Refining
Defined Business Unit's Sales to
Holsum, Wilsey & Ventura

Years Ended May 31,
-------------------
1997 1996 1995
------------ ------------ -----------

Sales ($) $110,679,000 $124,299,000 $79,133,000
Percentage of total
refinery sales ........... 45% 45% 30%

Ventura Foods is in the business of manufacturing and/or packaging and
selling food products, including salad dressings, mayonnaise, margarine, salad
oils, jams, jellies, olives, syrups, soup bases and sauces. Its customers are
national. Ventura Foods is governed by a committee, and each of the Company and
Wilsey Foods appoints half the committee members. Neither the Company nor Wilsey
Foods may transfer any part of its interest in Ventura Foods until September 1,
1999. Thereafter a transferring party must retain at least a 25.5% interest in
Ventura Foods. Ventura Foods will be dissolved if it has cumulative losses in
excess of $25 million or is unable to discharge its liabilities as they become
due.

WHEAT MILLING DEFINED BUSINESS UNIT

The Company's Wheat Milling Defined Business Unit mills durum wheat
into flour and semolina and, to a lesser extent, mills spring and winter (hard)
wheats into bread flour. The Wheat Milling Defined Business Unit is the largest
miller of durum wheat in

the United States. The Wheat Milling Defined Business Unit had historically
concentrated on durum wheat milling at its Rush City and Huron facilities. With
the opening of its Kenosha mill in late 1995, which can produce durum and bakery
flours, and its Houston facility, which began limited production in June 1997
and produces bakery flour, the Defined Business Unit has broadened its markets
and significantly increased its capacity.

Semolina and Durum Flour. Durum wheat millers process durum wheat into
semolina and durum flours. Semolina and high grade durum flours are the chief
ingredient in pasta; low grade durum flour is used for pet food. Durum is grown
in arid regions of the United States, such as North Dakota and certain areas of
the Southwest, as well as in other countries. Most of the quality durum is grown
in the Midwest, particularly North Dakota. Durum milling plants are generally
located in proximity to customers; wheat is shipped to the mill for milling.

Sale of semolina and durum flour is entirely dependent on pasta
production. Per capita consumption of pasta has continued to increase in recent
years, and the number of consumers continues to grow with population growth.
Pasta in its many forms is sold at retail, for restaurants and institutional use
and for use in other processed food products.

Imported pasta accounted for approximately 12% of the domestic market
in the year ended May 31, 1997. The International Trade Commission in July 1996
determined that certain Italian and Turkish companies benefited unfairly from
subsidies and had sold product in the United States at less than fair value and
imposed countervailing and anti-dumping duties. Despite the imposition of
duties, imports have slightly increased.

Major competitors in the industry include the Company, Italgrani and
Miller Milling. Competition is driven by price, service and product quality.
Some competitors have developed long-term relationships with customers by
locating plants adjacent to pasta manufacturing plants.

Bakery Flour. Bakery flour milled from spring and hard winter wheat is
used in breads, cookies, pizza crusts, tortillas and other products. The baking
industry is highly fragmented, with the largest participant being no more than
four percent of the market.

Demand for bakery flour has been stable, as total production and per
capita consumption increased in the year ended May 31, 1997. New dietary
guidelines established by the United States Department of Agriculture emphasize
cereal grains in the food pyramid. The Company believes that demand for bakery
flour will increase based on population growth. Imports and exports of bakery
flour do not significantly affect the domestic business.

Equity Participation Units

At May 31, 1997, Equity Participation Units in the Wheat Milling
Defined Business Unit represented the right to deliver 4,787,000 bushels of
wheat, approximately 11% of the processing capacity of the Defined Business Unit
before the construction of the Pocono mill.

Price Risk and Hedging

exchanges. Most of the grain volume handled by the Company can be hedged. Some
grains, such as durum, cannot be hedged because there are no futures for certain
commodities. For those commodities, risk is managed through the use of forward
sales and different pricing arrangements and to some extent cross-commodity
futures hedging. While hedging activities reduce the risk of loss from changing
market values of grain, such activities also limit the gain potential which
otherwise could result from changes in market prices of grain. The Defined
Business Unit's policy is to generally maintain hedged positions in grain which
is hedgeable, but the Company can be long or short at any time. The Defined
Business Unit's profitability is primarily derived from margins on grain
processed, not from hedging transactions. Management does not anticipate that
its hedging activity will have a significant impact on future operating results
or liquidity. Hedging arrangements do not protect against nonperformance of a
contract.

Supply

Most of the durum, spring and winter wheats processed by the Wheat
Milling Defined Business Unit is purchased from Members. Some grain is purchased
from Canada and a small percentage is purchased from the Southwest.

Semolina and durum flour sales are hedged to a significant extent by
buying durum at the time of pricing the semolina or flour. To minimize the price
volatility for winter and spring wheats, the Wheat Milling Defined Business Unit
usually hedges by purchasing wheat futures at the time of pricing the flour.
There is no futures market for durum, and except for limited cross hedging using
other commodities, the Wheat Milling Defined Business Unit does not hedge durum.

The availability, price and quality of durum and spring and winter
wheat affect the operations and profitability of the Wheat Milling Defined
Business Unit. The Wheat Milling Defined Business Unit has never experienced a
supply shortage of durum, but shortages have affected prices.

Customers

Semolina & Durum Flour. The Wheat Milling Defined Business Unit sells
semolina and durum flour to eight major customers and approximately 50 smaller
customers, which are large and mid-size pasta manufacturers in the United
States. In the year ended May 31, 1997, over 34% of the Wheat Milling Defined
Business Unit's total production was sold to its two largest customers, Borden
(23% of sales) and Hershey (11% of sales), which are estimated by the Company to
represent

a majority of the country's pasta production. The Wheat Milling Defined
Business Unit would be adversely affected by the loss of either of these
customers or a decline in the market share of either customer. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation -- Wheat
Milling Defined Business Unit" with respect to plant closures by Borden.

The Wheat Milling Defined Business Unit would be adversely affected by
a decline in pasta production in the United States.

Most of the Wheat Milling Defined Business Unit's products are marketed
by employees of the Defined Business Unit. The Wheat Milling Defined Business
Unit uses outside agents and distributors for the balance of its production.

Bread Flour. The baking industry is composed of many companies. No one
customer buys more than 16% of the Wheat Milling Defined Business Unit's bread
flour production. The Company believes because of the large number of potential
customers and the fact that the Wheat Milling Defined Business Unit is not
dependent on any customer, it would not have substantial difficulty in replacing
an existing customer.

The Wheat Milling Defined Business Unit's first hard wheat milling unit
(Kenosha) began production in late 1995. In October 1996, the Wheat Milling
Defined Business Unit expanded hard wheat capacity with the addition of a swing
mill at Kenosha capable of milling either durum or hard wheat flour. A plant in
Houston, which began limited production in June 1997, added additional hard
wheat capacity. The Company believes that there is a substantial customer base
available in the Houston area, as well as export markets. The mill serves a
sizeable population base and there are no other milling facilities within the
area.

Competition

Durum Milling. The Wheat Milling Defined Business Unit's largest
competitors in durum milling are Italgrani and Miller Milling Company.

Dakota Growers has expanded its Carrington, North Dakota, milling
facility and its pasta production capacity. Philadelphia Macaroni is building a
semolina mill in Minot, North Dakota. "Milling and Baking News" reported that
General Mills is expanding its mill in Great Falls, Montana. The Company has
heard that Italgrani is converting its durum milling capacity in Ayers,
Massachusetts, to hard wheat milling.

Bread Flour. Competitors include ConAgra, ADM, Cargill, Bay State
Milling, Cereal Foods and General Mills. All of these competitors have multiple
milling facilities with larger bakery flour production capacity than the Wheat
Milling Defined Business Unit. Capacity for hard wheat milling has been
expanding faster than consumption. This additional capacity may put pressure on
margins.

Processing

The Defined Business Unit mills wheat into flour using standard
industry processes. More recently manufactured equipment has reduced the labor
component of wheat milling. The Company believes that its facilities are, on
average, newer than its competitors. Operations are somewhat seasonal in
anticipation of reduced demand for pasta in summer months.

Facilities

The Wheat Milling Defined Business Unit has four milling facilities in
operation, including Houston which began limited production in June 1997. Each
facility includes a milling plant as well as an elevator to store grain.
Information on the four mills, plus the planned Pocono mill described below, is
set forth below:

Location Grain Milled Capacity
-------- ------------ --------
Rush City, MN Primarily durum 10,000 cwts/day

Huron, OH Primarily durum 14,500 cwts/day

Kenosha, WI Durum 11,000 cwts/day
Spring and winter wheat 10,000 cwts/day

Houston, TX Spring and winter wheat 13,000 cwts/day

Pocono, PA Durum 4,000 cwts/day
Spring and winter wheat 14,000 cwts/day
---------------
Total 76,500 cwts/day
===============

The Rush City and Kenosha facilities are owned entirely by the
Company.

At Houston, the milling plant is constructed on property leased from
the Port of Houston on a long-term basis and the elevator is owned by the Port
of Houston, but is subject to a put through agreement with the Company. The
Huron facility is leased on a long-term basis, but the equipment is owned.

Because transportation costs for durum, spring and winter wheats are
cheaper than for the milled products, it is a strategic advantage for a mill to
be located close to a large customer base rather than close to the producer.
Each of the Huron, Kenosha and Houston mills are in proximity to a large
customer base.

Approximately 85% of the Wheat Milling Defined Business Unit's current
milling capacity uses equipment that is less than 10 years old. This newer
equipment generates cost advantages in labor, energy, improved yields and better
and more consistent products. In the last few years, some competitors have
closed less efficient mills in less strategic locations.

The Wheat Milling Defined Business Unit will begin constructing semolina
and flour and bread flour mills in Pocono, Pennsylvania in the Fall of 1997. The
Harvest States Board of Directors has increased the authorized expenditures from
$38,800,000 to $41,350,000 for the construction of this mill. Of this amount,
$30,000,000 is projected to be expended in fiscal year 1998.

For the year ended May 31, 1997 the Wheat Milling Defined Business Unit
facilities ran at 97% of capacity based upon a year of 307 operating days being
100%.

Employees

As of May 31, 1997 the Wheat Milling Defined Business Unit employed the
following full time equivalents: production (104), plant management (22) and
headquarters (21). Of these, 31 production workers at the Rush City Mill are
subject to a collective bargaining agreement with the American Federation of
Grain Millers expiring in 1998.

FARM MARKETING AND SUPPLY

The Farm Marketing and Supply Division owns and operates Agri-Service
Centers at 154 locations in Minnesota, North Dakota, South Dakota, Montana,
Idaho and Washington. Agri-Service Centers sell farm supplies, including
fertilizer, feed, seed and crop protection products, and other related services
and have grain elevator operations that buy grain. Some Centers have only grain
operations or grain and feed operations, while some have only supply operations.
Locations are grouped together into 74 units for operational purposes. A small
number of Centers are grouped into seven regionalizations, which have their own
producer board and participate in separate patronage pools.

Agri-Service Centers purchase grain from member and non-member
producers and others, such as other elevators and grain dealers. Of these
facilities, 55 have the capability of loading unit trains, while other
facilities can load only single cars or are truck stations. Most of the grain
purchased is sold through the Company's Grain Marketing Division, with the
balance going to local feed and grain processors.

The supplies and services offered vary from location to location.
Agronomy supplies and services are sold at approximately 70 locations to member
and non-member producers. Feed is sold at approximately 75 locations. Agronomy
and feed sales are considered distinct operations involving different expertise
and sales forces.

Most feed sold is purchased from the Feed Division. Fertilizer is
obtained from co-op sources and other suppliers. Crop protection products are
bought through co-op programs and directly from industry sources. Other goods
are obtained through commercial channels.

The Company has increased the number of Agri-Service Centers in recent
years. The number of centers, operating units, bushels of grain sold and sales
at centers for the years ended May 31 are shown below:

1997 1996 1995 1994 1993
-------------- -------------- -------------- -------------- --------------

No. of centers.. 154 144 121 115 105
No. of op. units 74 47 43 43 42

Grain sales (bu) 199,922,000 214,085,000 159,891,000 141,238,000 175,492,000
Sales .......... $1,136,700,000 $1,126,600,000 $ 679,200,000 $ 613,151,000 $ 651,697,000

Competitors for the purchase of grain include other elevators and large
grain marketing companies. Competitors for the sale of agronomy supplies and
feed include a variety of cooperative and privately owned facilities. The
Company competes on the basis of service and patronage.

The Division is exploring and pursuing the expansion of track at a
number of locations to accommodate 108-car loading due to recent rate changes by
the railroads which provide a rate advantage for 108-car trains over 54-car
trains.

On May 31, 1997, the Division had 764 full time employees and 338
temporary employees.

Fin-Ag, Inc. Fin-Ag, Inc. is a wholly owned subsidiary of the Company
located in Sioux Falls, South Dakota. It provides seasonal cattle feeding and
swine financing loans, facility financing loans and crop production loans for
producers. It also provides consulting services to member cooperatives. Its
competitors are other financial institutions. Most whole loans are sold to the
St. Paul Bank for Cooperatives, on which the Company bears a 15% residual
exposure. The Company's exposure at May 31, 1997, was approximately $4,000,000.
Under the Company's borrowing arrangements the maximum amount of the loans
outstanding at any one time may not exceed $35,000,000.

FEED

The Company manufactures and sells feed products and sells feed
ingredients, supplements and animal health products under several brand names,
including GTA Feeds(R), Norco Feeds, CC Bar Feeds, Let'er Buck Feeds(R) and
Pantec(TM). In addition, it provides livestock production services, including
customized ration planning, feedstuffs analysis, profit projections, livestock
nutritional management, recordkeeping, animal health and environmental
engineering and facility management. Sales are made at retail through five
retail stores and through Agri-Service Centers and at wholesale to cooperatives
(both Affiliated Associations and otherwise) and to other retail farm supply
businesses located in Minnesota, North Dakota, South Dakota, Nebraska, Montana,
Wyoming, Idaho, Washington and Oregon.

Sales of feed for the years ended May 31 are set forth below:

1997 1996 1995 1994 1993
---- ---- ---- ---- ----

Manufactured feed (tons).... 326,000 351,000 333,000 306,000 301,000

The Company has been able to increase sales and production capacity through
several joint venture arrangements entered into in recent years. The decrease in

manufactured feed tons from 1996 to 1997 was primarily due to the high cost of
feed in relation to the low cattle price, which caused a decline in feed demand.

The Company owns nine manufacturing facilities located in Sioux Falls,
South Dakota; Great Falls, Montana; Hardin, Montana; Dickinson, North Dakota;
Minot, North Dakota; Edgeley, North Dakota; Willmar, Minnesota; Gettysburg,
South Dakota; and Norfolk, Nebraska. The Company also has an interest in three
joint ventures with facilities in Hermiston, Oregon; Tillamook, Oregon; and
Owatonna, Minnesota. The administrative office for the feed business is located
in Sioux Falls, South Dakota.

The Feed Division's operations reflect the condition of the livestock
business. Recent increases in poultry and swine production have been driven by
increased exports. The transition from individual producers to more integrated
producers has affected the demand for and composition of the Division's
products.

At May 31, 1997, the Division had 262 full time and 7 part time
employees.

Competitors in the feed business are other cooperatives and private
companies.

The Company is a part of the Cooperative Research Farms, a research
partnership of 12 regional cooperatives in the United States, Canada and France.
This partnership provides the Company with production research.

SERVICES

The Company's Country Services Division provides certain services to
Individual Members and Affiliated Associations.

Country Hedging, Inc.

Country Hedging, Inc. offers full service commodity futures and options
brokerage. For the year ended May 31, 1997, 60% of revenues were from Affiliated
Associations, 30% from Individual Members and 10% from others. This separate
subsidiary of the Company is a registered futures commission merchant and a
clearing member of both the Minneapolis Grain Exchange and the Kansas City Board
of Trade. On May 31, 1997, it had 40 employees operating primarily out of St.
Paul, Minnesota.

Competitors include international brokerage firms, national brokerage
firms, regional brokerage firms (both co-op and non-co-op) as well as local
introducing brokers. Competition is driven by price and service.

Ag States Agency, LLC

Ag States Agency, LLC, 50% owned by the Company, is an independent
insurance agency which sells insurance primarily to local cooperatives,
including group benefits, property and casualty, and bonding programs. For the
year ended May 31, 1997, substantially all of its revenues were from local
cooperatives. Ag States Agency, LLC competes with other insurance agencies.

Financial Services Department

The Financial Services Department provides business planning consulting
and financing to Affiliated Associations. It offers open account financing,
involving the discretionary extension of credit, and term and seasonal loans.
Most of the term and seasonal loans are participated up to 90% by National Bank
for Cooperatives (CoBank). Participation by CoBank is subject to credit approval
on a loan-by-loan basis by CoBank, subject to an overall limit of participation
of $150,000,000. In addition to financing, the open account between the Company
and an Affiliated Association is used as a clearing account for settlement of
grain purchases and as a cash management tool. Open account financing has been
provided to more than 200 Affiliated Associations in the past year.

During the year ended May 31, 1997, average aggregate loan balances
outstanding were $54,013,000 (of which CoBank's participation was $31,651,000)
and the highest aggregate loan balance outstanding at any one time was
$104,225,000 (of which CoBank's participation was $58,785,000). The Company's
borrowing arrangements limit loan balances outstanding to not more than
$150,000,000 at any one time.

Pursuant to its agreement with CoBank, the Company has additional
credit risk on CoBank participations to 10% of total loan commitments.

Fin-Ag, Inc., a wholly owned subsidiary of the Company provides certain
types of financing to members. See "Farm Marketing and Supply".

Affiliated Accounting Department

The Affiliated Accounting Department offers computerized country
elevator accounting systems and a full complement of accounting support systems
for local cooperatives, including tax and patronage allocation services,
dividend ledger services and payroll services. For the year ended May 31, 1997,
substantially all of its revenues were from local cooperatives.

Field Services Department

The Field Service Department acts as a liaison between Affiliated
Associations and the Company, providing consulting services in marketing,
management, operations, accounting, tax, finance and government regulations.

Member Relations Department

The Member Relations Department conducts cooperative education programs
for Affiliated Associations and assists in planning meetings and organizing
visits to Company facilities.

MEMBERSHIP IN THE COMPANY AND AUTHORIZED CAPITAL

Introduction

The Company is a membership cooperative organized to manufacture,

process, market, purchase, handle, deal in and sell the agricultural products of
its members, non-member patrons and others, including the processing and
exporting of grain and other agricultural products; to procure supplies and
equipment and to perform any and all services for its members, non-member
patrons and others; and to engage in any other activity for which cooperative
associations may be lawfully organized under Minnesota law. All net savings from
member patronage of the Company shall be distributed to members on the basis of
patronage. These net savings, when distributed, are referred to as "patronage
dividends," regardless of whether distributed in cash or in Patrons' Equities.
All net savings from non-member patronage of the purchasing operations and from
"Non-Member Consenting Patron" patronage of marketing operations shall be
distributed to such patrons on the basis of patronage. The determination of net
savings may be made by divisions or units representing separate or different
operations of the Company, as determined by the Board of Directors. Patronage
refunds may be distributed in cash, written evidences of equity or book credits,
or any combination thereof. Any non-cash allocations are redeemable only in the
discretion of the Board of Directors.

The net earnings (after provision for income taxes) of the Company, as
reported in its financial statements for the year, less patronage dividends paid
with respect to the fiscal year may be distributed in the discretion of the
Board of Directors to member patrons and to non-member "consenting patrons"
(defined as cooperative associations meeting all requirements for membership in
this Association other than transacting the minimum amount of business) on the
basis of their patronage. Distributions may be in cash, property, Non-Patronage
Earnings Certificates or any combination thereof designated by the Board of
Directors. To date, the Board of Directors has always used Non-Patronage
Earnings Certificates for distributions, and the current redemption policy is to
redeem to estates.

In making any such non-member/non-patronage distributions, the Board of
Directors may use any method of allocating the earnings on the basis of
patronage to member patrons and Non-Member Consenting Patrons as shall be
reasonable and equitable in the judgment of the Board of Directors.

The method of allocation for the non-member/non-patronage earnings of
the Company for the fiscal year ended May 31, 1997 was based on bushels of the
grain marketing/processing activity and dollars on the purchasing and other
activity. This method is subject to change, in the discretion of the Board of
Directors.

Governance

The business and affairs of the Company are managed by a Board of
Directors of not less than 13 persons (currently set at 14), elected by the
members at the Company's annual meeting. Various rights and obligations of
members are contained in its Articles of Incorporation and Bylaws (together, the
"governing documents"), each of which was amended and restated in November

1996. The governing documents may only be amended upon approval of a majority of
the votes cast at an annual or special meeting of the members, except for the
higher vote described under "--Certain Antitakeover Effects."

Membership

Membership in the Company is limited to individuals or entities
actually engaged in the production of agricultural products and associations of
agricultural producers organized and operating under the provisions of the
Agricultural Marketing Act and the Capper-Volstead Act. In addition, only those
persons that are "currently active patrons" (defined as agricultural producers
and associations of agricultural producers that have patronized the Company
during the year for which such status is being determined in a minimum amount
established by the Board of Directors) may be members of the Company.

Under the Company's governing documents, the Company has several
classes of membership and has authority to issue a variety of debt and equity
instruments to members. As a membership cooperative, the Company is not
authorized to issue capital stock. Under the Minnesota Cooperative Law, under
which the Company is organized, a cooperative may be organized on a membership
basis or a capital stock basis. A cooperative is organized on a capital stock
basis if holding shares of common stock entitles the holder to vote. Membership
is transferable only with the consent and approval of the Board of Directors.
The Company may issue equity or debt securities, on a patronage basis or
otherwise, but unless authorized in, or by the Board of Directors pursuant to,
the Company's Bylaws, such securities shall not entitle the holders thereof to
any voting, membership or other rights to participate in the affairs of the
Company and are not transferable without the prior consent of the Board of
Directors.

The Company's governing documents establish three classes of
membership:

Individual Members are individuals or entities actually engaged in the
production of agricultural products. Such Individual Members include
both natural persons as well as any legal entity owned or controlled by
individual farmers or their families, such as joint ventures,
corporations, partnerships, limited liability companies and other
entities.

Affiliated Associations are associations of agricultural producers that
have transacted at least $100,000 of business with the Company during
the preceding fiscal year. Affiliated Associations must be cooperatives
or other associations of agricultural producers organized and operating
under the provisions of the Agricultural Marketing Act and the
Capper-Volstead Act.

Defined Members are either persons actually engaged in the production
of agricultural products or associations of producers of agricultural
products that are holders of Equity Participation Units. See "--Defined
Members" below.

Membership in the Company will be terminated by the Board of Directors
if a member has become ineligible for membership (for example, by the cessation
of agricultural production activities). The Board of Directors has the
discretion to terminate membership for a variety of reasons, including repeated
violations of the Company's Bylaws, failure to patronize the Company for a
period of 12 consecutive months and breach of any contract with the Company. In
addition, any member's membership in the Company is terminated when that member
either dies or is legally dissolved. Upon termination of membership, a former
member loses any and all voting rights in the Company. A former member has no
right to require immediate repayment of patronage.

Voting Rights

Affiliated Associations are entitled to a number of delegates based on
the dollar volume of business done with the Company during the last full fiscal
year ending prior to the date of the meeting at which the voting power is to be
exercised. The number of delegates ranges from one delegate for any Affiliated
Association with business from $100,000 up to $1,500,000 during the prior year
to 15 delegates for any Affiliated Association with business in excess of
$45,000,000 during the prior year. Each delegate from an Affiliated Association
is entitled to cast 200 votes on any matter presented to the members for a vote.
The dollar volume of business delivered by a Defined Member to an Affiliated
Association for handling on behalf of the Company and Defined Member will be
included in calculating the dollar volume of an Affiliated Association for
purposes of voting.

Individual Members and Defined Members are entitled to one vote.
Individual Members and Defined Members may directly cast their votes on matters
presented to the members of the Company only if, for Defined Members, they have
provided notice of such intention to the Company, and, for Individual Members,
if they have obtained a certificate signed by a manager of the Company facility
patronized by such Individual Member. Any such certificate or notice must be
provided to the Company at least 10 days before the meeting at which the voting
rights are to be exercised.

Individual Members and Defined Members may exercise their voting power
through the designation of a "patrons' association." A patrons' association is
an association of the Individual Members associated with a grain elevator, feed
mill, seed plant or any other Company facility or an association of Defined
Members, as designated and recognized by the Board of Directors. The membership
of a patrons' association may include both Individual Members and Defined
Members. The Individual Members and Defined Members that are identified with a
particular patrons' association may, at an annual meeting of the patrons'
association, elect delegates and alternates for the patrons' association on the
basis of one vote per member. Each patrons' association is entitled to a number
of delegates based on the dollar volume of business activities of the patrons'
association's currently active patrons and Defined Members with 200 votes per
delegate, reduced by the number of individual votes personally voted.

Members may cast their votes, if the Board of Directors so elects, by
mail voting in certain situations. At least 50 members of the Company
represented in person, by delegates or by mail votes constitutes a quorum for
business at any meeting, unless the Company has fewer than 500 members, in which

case a quorum is comprised of 10% of the total number of members.

Defined Members

Each Defined Member is affiliated with a "Defined Business Unit" and
holds Equity Participation Units in that Defined Business Unit. Holders of
Equity Participation Units have delivery rights and obligations for farm
products pursuant to a member marketing agreement between such Defined Member
and the Company.

Each Defined Business Unit is represented by a Defined Member Board,
comprised of between five and ten individuals. The members of a Defined Member
Board must be either Defined Members or representatives of Defined Members and
in good standing and in full compliance with all delivery obligations with
respect to the applicable Defined Business Unit, provided, however, no employee
of the Company may serve as a member of the Defined Member Board. The initial
Defined Member Board of each Defined Business Unit was elected by the Company's
Board of Directors in June, 1997. Eight individuals were appointed to serve on
the Wheat Milling Defined Member Board, a Chairman plus one member from District
1, three members from District 2, one from District 3, one from District 4 and
one from District 5. Six individuals were appointed to serve on the Oilseed
Processing and Refining Defined Member Board, a Chairman plus three members from
District 1, one member from District 2 and one member from District 3.
In November of 1997 the Defined Member Boards of each Defined Business Unit
will be elected by the Defined Members associated with the particular Defined
Business Unit on a one Defined Member/one vote basis. The Defined Member Boards
adopted a Nominating and Election Procedure which has been sent to each Defined
Member. In subsequent years, Defined Members will elect members of the Defined
Member Boards as their terms expire. The Chairperson is selected by and from the
Company's Board of Directors. Individuals serving on a Defined Member Board
shall serve staggered three-year terms. Each Defined Member Board shall meet at
least quarterly and shall be charged with reflecting Defined Member concerns and
providing a direct communication mechanism to the Company's Board of Directors.

While the Board of Directors has no present intention of doing so, the
Company is authorized to retain a portion of the payments otherwise due to
Defined Members for purchases of products from them. Such retention is referred
to as a "unit retain." Unit retains would only be established by the Board of
Directors to provide a source of cash for its immediate needs and would be
limited to a small percentage of the payments due for purchase of products
pursuant to the Agreement. The imposition of unit retains would adversely affect
a member's cash income and cash position. The Company has the option to treat
any such unit retains as taxable to the Company or to treat the unit retains as
nontaxable by declaring the unit retains as "qualified." Qualified unit retains
are taxable to the Defined Member in the tax year when the Defined Member
receives notification that a unit retain has been established. When a qualified
unit retain is reimbursed or redeemed, the Defined Member reports no additional
income. Unit retains may be called for payout at the lesser of their stated or
book value at the discretion of the Board of Directors. The Company intends to
establish a redemption schedule if it authorizes unit retains.

Debt and Equity Instruments

The Company is authorized to issue a variety of debt and equity
instruments to its current members, patrons and to persons who are neither
members nor patrons. The Company's outstanding capital is represented by Capital
Equity Certificates, non-patronage certificates and certain capital reserves.

The Company's Bylaws provide the following securities may be issued to
current or former members or patrons:

Equity Participation Units. Equity Participation Units may be
held only by Defined Members and have no voting rights. Defined Members
have voting rights to elect a Defined Member Board.

Capital Equity Certificates. Capital Equity Certificates may
be issued by the Company in partial or complete distribution of
patronage refunds. Capital Equity Certificates do not bear any interest
or carry any dividends. They do not have a specified maturity date
unless established by the Company's Board of Directors.

Certificates of Indebtedness. The Board of Directors may issue
Certificates of Indebtedness from time to time. Such Certificates will
carry such terms and conditions as the Board of Directors establishes
in its discretion. The Board may also establish the conditions upon
which such Certificates of Indebtedness may be called for payment by
the Company.

Non-Patronage Earnings Certificates. The Board of Directors
may issue Non-Patronage Earnings Certificates. Such certificates will
not have a maturity date and will not bear interest or annual
dividends. They will be issued and distributed only to member patrons
and to Non-Member Consenting Patrons as part of a
non-member/non-patronage distribution. (Non-Member Consenting Patrons
include Affiliated Associations that meet all of the requirements of
membership as an Affiliated Association except that they do not
transact at least $100,000 of business with the Company during the
preceding fiscal year.)

Preferred Capital Certificates. The Board of Directors may
establish and designate the designation, preferences and relative
rights of one or more series of Preferred Capital Certificates.
Preferred Capital Certificates will not carry any voting rights.

Other. The Board of Directors may issue other debt or equity
instruments. The Bylaws contain no restrictions on the issuance or the
terms of such other debt or equity instruments.

Voting rights arise by virtue of membership in the Company, not because
of holding any instrument. The Board of Directors may issue "Preferred Equities"
and other debt or equity instruments to individuals who are not members or

patrons of the Company. The Board of Directors has the discretion to establish
and designate one or more series of Preferred Equities and to fix the relative
rights, preferences and privileges of such Preferred Equities. Any Preferred
Equities will not carry voting rights. No such Preferred Equities are presently
outstanding, and the Board of Directors has no present plan or intent to issue
Preferred Equities. However, if it were to do so, it could establish rights,
preferences and privileges relative to the holders of the Units and other
securities of the Company. Such preferences could include provisions for
priority in payment. The Board of Directors may authorize the issuance of
Preferred Capital Certificates pertaining to a particular Defined Business Unit.
If such Certificates were issued, they could have a preference in payment over
patronage refunds of a particular Business Unit.

Transfer of Patrons' Equities. Debt or equity instruments held by the
Company's members and patrons, including Equity Participation Units, Capital
Equity Certificates, Certificates of Indebtedness, Non-Patronage Earning
Certificates and Preferred Capital Certificates, may be transferred only with
the consent and approval of the Company's Board of Directors. The Company may
require the execution of appropriate transfer documentation, as well as
representations and warranties from the proposed transferee indicating that he
or she is eligible to be the holder of the instrument proposed to be
transferred.

Redemption or Retirement of Patrons' Equities and Allocated Reserve.
Redemption or retirement of Patrons' Equities is solely within the discretion of
and on the terms as determined by the Board of Directors. The Board of Directors
has authorized the redemption of Capital Equity Certificates held by patrons who
are 72 years of age, as well as Capital Equity Certificates held by estates of
deceased patrons. There can be no assurance that the Company's Board of
Directors will not elect to modify its policy regarding the redemption of
Capital Equity Certificates. The Board is under no restriction in modifying such
policy, other than legal agreements to which the Company may be a party from
time to time. Members are not required to approve a change in such policy. The
Board of Directors will establish a redemption policy for Patrons' Equities
arising from Defined Business Units.

Distribution of Assets Upon Dissolution

Upon dissolution, liquidation or winding up of the Company, all debts
and liabilities of the Company will be paid in accordance with their respective
priorities. All equity capital will then be allocated among the various holders
of the equity instruments in accordance with the following priorities: first,
the assets held by any Defined Business Unit will be used to redeem the Equity
Participation Units and Preferred Capital Certificates of such Defined Business
Unit, on a pro rata basis; next, all Equity Participation Units and Preferred
Capital Certificates will be paid to the extent of their face amount or par
value; next all Capital Equity Certificates and other outstanding equities
(other than Non-Patronage Earnings Certificates) will be paid in the amount of
the par value or face amount of such instruments; next, payment will be made in
the face amount of any issued and outstanding Non-Patronage Earnings
Certificates. Any remaining assets of the Company will be distributed on an
allocation unit basis among the members of the Company in proportion to their

patronage.

Certain Antitakeover Effects

The governing documents may be amended upon the approval of a majority
of the votes cast at an annual or special meeting. However, in the event that
the Board of Directors declares, by resolution adopted by a majority of the
Board of Directors present and voting, that the amendment involves or is related
to a hostile takeover, the proposed amendment must be adopted by the approval of
80% of the total voting power of the members of the Company. It is within the
sole determination of the Board of Directors to declare that a transaction
involves a "hostile takeover," which term is not further defined in the
Minnesota cooperative law or the governing documents.

Tax Treatment

Subchapter T of the Internal Revenue Code sets forth rules for the tax
treatment of cooperatives and applies to both cooperatives exempt from taxation
under Section 521 of the Internal Revenue Code and to nonexempt corporations
operating on a cooperative basis. The Company is a nonexempt cooperative.

As a cooperative, the Company is not taxed on amounts withheld from its
members in the form of qualified unit retains or patronage dividends, or in the
amount distributed in the form of patronage payments. Consequently, such amounts
are taxed only at the patron level. However, the amounts of any non-qualified
unit retains or patronage dividends are taxable to the Company when allocated.
Upon redemption of any such non-qualified unit retains or patronage dividends,
the amount is deductible to the Company and taxable at the member level.

Income derived by the Company from non-patronage sources is not
entitled to the "single tax" benefit of Subchapter T and is taxed to the Company
at corporate income tax rates.

EQUITY PARTICIPATION UNITS

Equity Participation Units ("Units") may be held only by Defined
Members. Defined Members are either persons actually engaged in the production
of agricultural products or associations of producers of agricultural products.
Each Defined Member is affiliated with a Defined Business Unit and holds Equity
Participation Units in that Defined Business Unit. Holders of Equity
Participation Units have delivery rights and obligations for farm products
pursuant to the Agreements between such Defined Members and the Company.

Each Defined Business Unit and the respective Equity Participation
Units were created by resolutions (the "Resolutions") of the Board of Directors,
acting pursuant to the governing documents, on January 11, 1997. The terms of
the Units are governed by the governing documents and the Resolutions. The
Resolutions may be amended by the Board of Directors, except in certain
respects, without a vote of holders of the Units. Holders of the Units have the
rights and remedies

provided by the Minnesota Cooperative Law.

Wheat Milling Defined Business Unit

Holders of Equity Participation Units in the Wheat Milling Defined
Business Unit have a right to participate in the patronage sourced income from
the operations of the Wheat Milling Defined Business Unit. Prior to the sale of
any Unit to any person, such person entered into an Agreement which gave the
right and obligation to such person to deliver the number of bushels of wheat
equal to the number of Units purchased by such Member. The delivery obligation
and right under the Agreement for the Wheat Milling Defined Business Unit will
become fully effective for the fiscal year in which the Pocono facility begins
operating. Defined Members will be notified. Until the Agreement becomes fully
effective, it will represent a right and obligation to deliver 78% of the wheat
set forth therein.

Patronage sourced income from the operations of the Wheat Milling
Defined Business Unit will be allocated by the Company as patronage refunds
based on the total amount of wheat processed. As between the holders of Equity
Participation Units, patronage sourced income will be allocated to each Defined
Member proportionate to the wheat delivered pursuant to the Agreement.

While Defined Members are entitled to the allocation of patronage
refunds originating from the Wheat Milling Defined Business Unit, they may also
receive, upon allocation by the Board of Directors, nonpatronage income from
operations of the Company, including operations of the Wheat Milling Defined
Business Unit generating nonpatronage income.

Oilseed Processing and Refining Defined Business Unit

Holders of Equity Participation Units in the Oilseed Processing and
Refining Defined Business Unit have a right to participate in the patronage
sourced income from the operations of the Oilseed Processing and Refining
Defined Business Unit. Prior to the sale of any Unit to any person, such person
entered into an Agreement which gave the right and obligation to such person to
deliver the number of bushels of soybeans equal to the number of Unitspurchased
by such Member.

Patronage sourced income from the operations of the Oilseed Processing
and Refining Defined Business Unit, excluding patronage sourced income from the
refining of crude oil purchased from others and excluding patronage sourced
income from Ventura Foods, will be allocated by the Company as patronage refunds
based on the total amount of soybeans processed, giving effect to Units held and
Units deemed to be held by the Company. As between the holders of Equity
Participation Units, patronage sourced income will be allocated to each Defined
Member proportionate to the soybeans delivered pursuant to the Agreement.

While Defined Members are entitled to the allocation of patronage
refunds originating from the Oilseed Processing and Refining Defined Business
Unit,

they may also receive, upon allocation by the Board of Directors, nonpatronage
income from operations of the Company, including operations of the Oilseed
Processing and Refining Defined Business Unit generating nonpatronage income.

Allocations Relating to Defined Business Units

Revenues from the sale of products of a Defined Business Unit shall be
credited to the Defined Business Unit, and all direct expenses incurred by a
Defined Business Unit shall be charged against the Defined Business Unit.
Corporate, general and administrative expenses of the Company shall be allocated
to each Defined Business Unit in a reasonable manner based on the utilization by
such Defined Business Unit. Intracompany accounts have been established for the
advancements to, and the loan of funds by, each Defined Business Unit, with
interest thereon imputed at prevailing rates. Income taxes shall be allocated to
each Defined Business Unit as if it were a separate taxpayer. Each Defined
Business Unit shall perform and be responsible for commitments, contingencies
and obligations allocated to such Defined Business Unit.

Patronage sourced income from the operations of a Defined Business Unit
(except as set forth above with respect to the Oilseed Processing and Refining
Defined Defined Business Unit) will be allocated by the Company as patronage
refunds based on the total amount of grain processed, giving effect to Units
held and Units deemed to be held by the Company. As between holders of the
Units, patronage sourced income will be allocated to each Defined Member
proportionate to the number of bushels of grain delivered pursuant to the
Agreement. Defined Members may also receive, upon allocation by the Board of
Directors, nonpatronage income from operations of the Company, including
operations of a Defined Business Unit generating nonpatronage income.

With respect to each year, the total net income from a Defined Business
Unit will be withdrawn by the Company from the Defined Business Unit, except to
the extent that patronage dividends are not paid in cash and are retained in the
Business Unit as equity. The Company will be responsible for the allocation of
net income arising from operations of a Defined Business Unit between Defined
Members of any one or more Defined Business Units and the remainder of the
Company's operations.

Upon the acquisition by the Company from a third party of any assets
(whether by means of an acquisition of assets or stock, merger, consolidation or
otherwise) reasonably related to a Defined Business Unit, such assets and
related liabilities, including commitments, contingencies and obligations, shall
be allocated to that Defined Business Unit and the aggregate cost or fair market
value of such assets and liabilities shall be paid by the Defined Business Unit.
Such allocation and determination of fair market value may be made by the Board
of Directors taking into account such matters as it and its advisers, if any,
deem relevant, and any such allocation and determination of fair market value
shall be final and binding for all purposes whatsoever.

Upon any sale, transfer, assignment or other disposition by the Company
of any or all assets of a Defined Business Unit (whether by means of a
disposition of assets, merger, consolidation, liquidation or otherwise), all
proceeds (including non-cash consideration received) or the fair market value
from such disposition shall be allocated to the Defined Business Unit. If an
asset is allocated to more than one Defined Business Unit, the proceeds or the
fair market value of the disposition shall be allocated among all Defined
Business Units, based upon their respective interests in such assets. Such
allocation and determination of fair market value shall be made by the Board of
Directors taking into account such matters as the Board of Directors and its
advisers, if any, deem relevant, and any such allocation and determination of
fair market value shall be final and binding for all purposes whatsoever.

The Board of Directors may from time to time reallocate any asset from
one Defined Business Unit to the Company or any other Defined Business Unit of
the Company at fair market value. Such determination of fair market value shall
be made by the Board of Directors taking into account such matters as the Board
of Directors and its advisers, if any, deem relevant, and any such allocation
and determination of fair market value shall be final and binding for all
purposes whatsoever.

The Company shall not enter into any agreement by which the net
patronage sourced earnings of a Defined Business Unit shall be allocated to any
person except to a person who owns or is deemed to own Units proportionate to
the patronage being so allocated.

Additional Equity Participation Units; Sale

The Board of Directors from time to time may authorize the sale by the
Company of Units deemed owned by the Company for the account of the Company
provided that sales shall be at a price determined by the Board of Directors
taking into account such matters as the Board of Directors and its financial
advisers, if any, deem relevant.

The Board of Directors may authorize the creation, issuance and sale of
additional Equity Participation Units from time to time on such terms and for
such consideration as it shall deem appropriate. Any proceeds from the sale of
such additional Equity Participation Units shall be allocated to the applicable
Defined Business Unit.

There are no limitations on the issuance or sale of additional Units in
the governing documents or in any loan agreements or other agreements or
instruments to which the Company is a party.

Holders of Units shall have no preemptive rights to subscribe for or
purchase additional Units or any other securities issued by a Defined Business
Unit or the Company. The Company intends to provide an opportunity for existing
holders to subscribe for additional Equity Participation Units.

The Company may, if authorized by the Board of Directors, purchase
Units at such price as it shall determine from time to time for its own account,
or for the account of a Defined Business Unit.

Merger, Consolidation or Sale

In connection with the merger, consolidation, liquidation or sale of
all or substantially all of the assets of the Company as an entirety or upon the
sale of all or substantially all of the assets of a Defined Business Unit, all,
but not less than all, Units of such Defined Business Unit shall be redeemed by
the Company at their original purchase price, provided that the Preferred
Capital Certificates or unit retains of such Defined Business Unit not
previously paid are also redeemed in connection therewith; that such payments
include any prorata profit (or loss) associated with disposition of the assets
of the Defined Business Unit as though the assets, subject to the liabilities,
of the Defined Business Unit had been sold in connection with such event at
their fair market value; and that provision is made for the allocations of
patronage sourced income arising prior to such transaction. Any determination of
fair market value shall be made by the Board of Directors taking into account
such matters as the Board of Directors and its advisers, if any, deem relevant.
A sale of more than 75% of the assets or earning power will be deemed "all or
substantially all" of the assets of the Company or a Defined Business Unit.

Operations

The operations of a Defined Business Unit shall be carried out by the
Company through the Board of Directors, officers and management of the Company.
The capital assets of a Defined Business Unit may be disposed of in the ordinary
course of business and the disposition of any substantial portion of the assets
of a Defined Business Unit as an entirety may be authorized by the Board of
Directors. The Board of Directors may determine to sell the assets and
operations of a Defined Business Unit or to abandon or shut down the operations
of a Defined Business Unit. Abandonment or shutting down the operations of a
Defined Business Unit (other than on a temporary basis) will be considered sale
of all of the assets of the Defined Business Unit and will have the effect
described under "--Merger, Consolidation or Sale."

Amendment of Board Resolutions

The resolutions adopted by the Board of Directors establishing the
Wheat Milling Defined Business Unit and the Oilseed Processing and Refining
Defined Business Unit may be amended from time to time by the Board of Directors
of the Company, except for those matters described under "Allocations Relating
to Business Units" and "Merger, Consolidation or Sale," which may be amended
only with the approval of a majority of Defined Members owning Units not held or
deemed held by the Company.

Member Marketing Agreement

A Defined Member will be obligated to deliver during each delivery year
one bushel of wheat or soybeans which is of merchantible quality, according to
industry standards, to the Company for each applicable Unit held, subject to
adjustment as described below, at delivery points designated by the Company;
provided, however that, until the Pocono facility commences operation, a Defined
Member contracting to deliver wheat shall only have the right and obligation to
deliver 78% of the contracted bushels. Wheat or soybeans that do not meet
applicable standards may either be rejected or accepted with such discounts as
may be established by the Company or agents. Deliveries may be made at any time
from June 1 through May 31. Certain Affiliated Associations have contracted with
the Company to act as an agent for handling required deliveries (and will
receive funds for that service). In addition, the Company has designated most of
its owned and operated elevators as delivery points (approx 135). The Board of
Directors may establish annual "tolerance ranges" allowing a Defined Member the
option to deliver more or less wheat or soybeans in any given year. Upon
transfer of Units, the remaining obligations under the Agreement must also be
assumed by the transferee of the Units. The Agreement may be terminated by an
Individual Member effective on May 31 of any year upon written notice of
termination. In addition, the Agreement may be terminated following a breach of
the Agreement by either party, upon thirty days' written notice from the party
not in breach. The Agreement may be terminated by the Company upon sale,
liquidation, dissolution or winding up of the applicable Defined Business Unit
in accordance with the Company's Bylaws.

The Company is obligated to take and pay for deliveries in accordance
with the Agreement. The price to be paid is based on the prevailing price at the
point of delivery agreed to between the Defined Member and the Company or its
agent at the time of sale. The final settlement price must be established prior
to the end of the processing year. In case of fire, explosions, interruption of
power, strikes or other labor disturbances, lack of transportation facilities,
shortage of labor or supplies, floods, action of the elements, riot,
interference of civil or military authorities, enactment of legislation or any
unavoidable casualty or cause beyond the control of the Company affecting the
conduct of the Company's business to the extent of preventing or unreasonably
restricting the receiving, handling, production, marketing or other operations,
the Company shall be excused from performance during the period that the
Company's business or operations are so affected. The Member shall not be liable
for failure or delay in performance of the Agreement to the extent such failure
or delay is caused by a crop failure due to an Act of God, such as drought or
flood.

The Company will pay to each Defined Member an annual patronage refund
equal to the portion arising from the net savings of the applicable Defined
Business Unit attributable to such Defined Member's patronage of the Defined
Business Unit.

Each Agreement is subject to amendment upon the approval of the Company
and the majority vote of the voting power of the applicable Defined Business
Unit. As a result, in the event that Members holding the majority of the voting
power of the applicable Defined Business Unit approve an amendment to the
Agreement which has been approved by the Company, those Defined Members who
voted against or oppose the amendment will be bound to performance of the
Agreement as amended.

Upon the termination of the operations of a Defined Business Unit, the
Marketing Agreement will automatically terminate.

The Company is authorized to retain a portion of the payments otherwise
due to Defined Members for purchases of products from them. Such retention is
referred to as a "unit retain." The Company has the option to treat any such
unit retains as taxable to the Company or to treat the unit retains as
nontaxable by declaring the unit retains as "qualified." Qualified unit retains
are taxable to the Defined Member in the tax year when the Defined Member
receives notification that a unit retain has been established. When a qualified
unit retain is reimbursed or redeemed, the Defined Member reports no additional
income. Unit retains may be called for payout at the lesser of their stated or
book value at the discretion of the Board of Directors.

Taxation

Patronage dividends arising under the Agreements with respect to the
Units will have the same tax treatment as patronage currently payable to
members.

Transfer of Equity Participation Units

Upon any transfer of Units, the transferee will be required to certify
as to eligibility and then current anticipated annual production and to sign an
Agreement. In approving any transfer, the Board of Directors will require that
such certificate show that the number of Units transferred does not exceed
anticipated annual production, that any transferee does not own more than 1% of
the outstanding capacity of any one Defined Business Unit and that the Units
held by each transferor retaining units and transferee represent at least 3,000
bushels of wheat or 1,500 bushels of soybeans.

ITEM 2. PROPERTIES

The Company owns or leases grain handling and processing facilities
throughout the United States. Below is a summary of these locations.

Grain Merchandising

The Company owns or leases grain terminals at the following locations:

Davenport, Iowa I (1)
Davenport, Iowa II (2)
Kalama, Washington (2)
Kansas City, Missouri I (2)
Kansas City, Missouri II (2)
Kennewick, Washington (1)
Myrtle Grove, Louisiana (1)
Petersburg, North Dakota (2)
St. Paul, Minnesota (2)
Savage, Minnesota (1)

Spokane, Washington (1)
Superior, Wisconsin (1)

- ----------------------
(1) Owned
(2) Leased

Oilseed Processing and Refining

The Oilseed Processing and Refining Defined Business Unit owns one
facility in Mankato, Minnesota, comprised of a crushing plant, a refinery, a
soyflour plant, and a quality control laboratory.

Wheat Milling

The Wheat Milling Defined Business Unit owns or leases flour milling
facilities at the following locations:

Rush City, MN (1) 10,000 cwts/day
Huron, OH (3) 14,500 cwts/day
Kenosha, WI (1) 21,000 cwts/day
Houston, TX (1) 13,000 cwts/day

- ------------------------
(1) Owned
(2) Leased
(3) Owned equipment, leased land and facilities

Agri Services Centers

The Company owns 154 Agri Service Centers (of which some of the
facilities are on leased land) located in Minnesota, North Dakota, South Dakota
and Montana.

Feed

The Company owns the following feed manufacturing facilities:

Dickinson, North Dakota
Edgeley, North Dakota
Gettysburg, South Dakota
Great Falls, Montana
Hardin, Montana

Minot, North Dakota
Norfolk, Nebraska
Sioux Falls, South Dakota
Willmar, Minnesota

ITEM 3. LEGAL PROCEEDINGS

The Company is a party to various lawsuits and administrative
proceedings incidental to its business. It is impossible at this time, to
estimate what the ultimate legal and financial liability of the Company will be;
nevertheless, management believes, based on the information available to date
and the resolution of prior proceedings, that the ultimate liability of all
litigation and proceedings will not have a material impact on the financial
statements of the Company taken as a whole.

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

No matter was submitted to a vote of security holders during the fourth
quarter of the year ended May 31, 1997.

PART II.

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

No equity securities were sold by the Registrant during the year ended
May 31, 1997, that were not registered under the Securities Act of 1933, as
amended.

ITEM 6. SELECTED FINANCIAL DATA

Consolidated Company

The selected financial information below has been derived from the
Company's consolidated financial statements for the years ended May 31, 1997,
1996, 1995, 1994, and 1993, which have been audited by Deloitte & Touche LLP,
independent auditors. The selected consolidated financial information should be
read in conjunction with the Company's consolidated financial statements and
notes thereto included elsewhere in this filing.

Summary Consolidated Financial Data

Years Ended May 31,
----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- -------------- -------------- -------------- --------------

Income Statement

Data:
Revenues
Sales:
Grain ............................. $6,036,502,624 $7,127,223,407 $4,191,665,535 $3,086,531,429 $2,793,407,187
Processed
grain ............................ 730,101,124 819,863,541 708,219,307 593,116,553 501,297,427
Feed and farm
supplies ......................... 258,235,512 207,252,696 156,699,068 165,925,459 138,103,158
-------------- -------------- -------------- -------------- --------------
7,024,839,260 8,154,339,644 5,056,583,910 3,845,573,441 3,432,807,772
Patronage
dividends ......................... 15,947,049 13,278,997 6,512,481 6,609,602 7,781,622
Other revenues ..................... 68,627,552 68,339,523 57,556,984 45,895,922 41,671,562
-------------- -------------- -------------- -------------- --------------
7,109,413,861 8,235,958,164 5,120,653,375 3,898,078,965 3,482,260,956
Costs and expenses:
Cost of goods
sold .............................. 6,967,937,476 8,076,073,326 4,981,820,272 3,786,336,764 3,384,637,000
Marketing, general,
and admin-
istrative ......................... 63,341,552 70,054,248 69,509,491 60,847,099 52,545,022
Interest ........................... 19,378,833 31,921,936 19,268,575 10,250,765 8,964,230
-------------- -------------- -------------- -------------- --------------
7,050,657,861 8,178,049,510 5,070,598,338 3,857,434,628 3,446,146,252
-------------- -------------- -------------- -------------- --------------
Earnings before
income taxes ....................... 58,756,000 57,908,654 50,055,037 40,644,337 36,114,704

Income taxes ......................... 6,200,000 6,900,000 5,100,000 5,500,000 3,725,000
-------------- -------------- -------------- -------------- --------------

Net earnings ......................... $ 52,556,000 $ 51,008,654 $ 44,955,037 $ 35,144,337 $ 32,389,704
============== ============== ============== ============== ==============

May 31,
----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- -------------- -------------- -------------- --------------

Balance Sheet Data
(at end of period):
Working capital .................... $ 111,811,047 $ 95,874,938 $ 66,904,085 $ 69,409,621 $ 69,550,702
Net property, plant
and equipment ..................... 224,150,965 232,145,401 205,837,690 156,311,551 146,223,870
Total assets ....................... 976,705,753 1,228,772,684 924,533,569 734,655,223 612,261,778
Long-term debt,
including current
maturities ........................ 134,458,466 132,629,176 84,816,525 39,135,097 44,479,207
Total equity ....................... 385,099,313 337,252,119 299,487,893 270,761,017 246,797,147

Oilseed Processing and Refining Defined Business Unit

The selected financial information presented below has been derived
from the Oilseed Processing and Refining Defined Business Unit's financial
statements for the years ended May 31, 1997, 1996, 1995 and 1994, which have
been audited by Deloitte & Touche LLP, independent auditors. The selected
financial information should be read in conjunction with the Defined Business
Unit's financial statements and notes thereto included elsewhere in this filing.

Years Ended May 31,
-------------------
1997 1996 1995 1994
------------- ------------- ------------- --------------

Revenues:
Processed Oilseed Sales ............ $ 441,737,923 $ 399,271,001 $ 398,095,108 $ 358,372,039
Other revenues ..................... (1,659,881) 1,435,708 1,162,518 1,349,484
------------- ------------- ------------- --------------
440,078,042 400,706,709 399,257,626 359,721,523
Costs and expenses
Cost of goods sold ................. 405,791,384 371,424,566 366,407,451 334,968,474
Marketing and
administrative ................... 4,341,904 4,544,763 5,137,663 4,722,900
Interest ........................... 321,700 151,500 -- 164,300
------------- ------------- ------------- --------------
.......................... 410,454,988 376,120,829 371,545,114 339,855,674
------------- ------------- ------------- --------------
Earnings before income
taxes .............................. 29,623,054 24,585,880 27,712,512 19,865,849
Income taxes ......................... 2,100,000 1,600,000 1,500,000 1,650,000
------------- ------------- ------------- --------------
Net earnings ......................... $ 27,523,054 $ 22,985,880 $ 26,212,512 $ 18,215,849
============= ============= ============= ==============
Operating Data:
Quantities processed
Soybeans (bu.) ................... 32,231,520 30,446,475 30,807,933 24,136,364
Crude oil (lb.) .................. 960,406,920 920,492,402 894,970,248 860,221,089
Production
Meal (tons) ...................... 741,922 728,435 741,190 588,873
Flour (tons) ..................... 35,714 39,914 40,614 31,614
Refined oil (lbs.) ............... 957,398,000 858,240,000 835,396,000 799,908,000

1997 1996 1995 1994
------------- ------------- ------------- --------------
Balance Sheet Data (at end of period):
Working capital .................... $ 20,305,438 $ 28,619,585 $ 32,980,590 $ 33,813,064
Net property, plant

and equipment .................... 33,085,560 24,771,413 20,410,408 19,577,934
Total assets ....................... 92,416,098 74,112,937 63,672,994 74,191,110
Long-term debt, including
current maturities ............... -- -- -- --
Total equity ................ 53,390,998 53,390,998 53,390,998 53,390,998

Other Data (1):
Pretax earnings .................... $ 29,623,054 $ 24,585,880 $ 27,712,512 $ 19,865,849
Earnings from purchased oil ........ (7,014,758) (3,557,406) (4,680,813) (4,511,979)
Non-patronage joint venture
income ............................ (614,967) (1,353,708) (990,191) (1,300,427)
Book to tax differences ............ 2,209,575 (71,485) 393,608 135,170
------------- ------------- ------------- --------------
Tax basis soybean earnings ......... $ 24,202,904 $ 19,603,281 $ 22,435,116 $ 14,188,613
============= ============= ============= ==============

Bushels processed .................. 32,231,520 30,466,475 30,807,933 22,630,472
Earnings per bushel ................ $ 0.75 $ 0.64 $ 0.73 $ 0.63

Pro Forma Information (2)

Year Ended
May 31,
1997
-----------

Equity Participation Units Outstanding 1,074,000
Patronage rate $ 0.75
-----------

Earnings to holders $ 805,500
===========

(1) Because patronage dividends attributable to the Units will be allocated
based on the number of bushels of soybeans delivered, information on
earnings per bushel is believed by the Company to be the most relevant
indicator of performance of the Oilseed Processing and Refining Defined
Business Unit.

(2) Based upon the actual number of Equity Participation Units outstanding
on May 31, 1997, the earnings of the Oilseed Processing and Refining
Defined Business Unit which would have been allocated to the Equity
Participation Units are shown above under the caption "Pro Forma
Information".

Wheat Milling Defined Business Unit

The selected financial information presented below has been derived

from the Wheat Milling Defined Business Unit's financial statements for the
years ended May 31, 1997, 1996, 1995 and 1994, which have been audited by
Deloitte & Touche LLP, independent auditors. The selected financial information
should be read in conjunction with the Defined Business Unit's financial
statements and notes thereto included elsewhere in this filing.

Years Ended May 31,
-------------------
1997 1996 1995 1994
------------- ------------- ------------- -------------

Revenues:
Sales .............................. $ 199,078,687 $ 173,315,613 $ 119,725,183 $ 103,716,012
Costs and expenses:

Cost of goods sold ................. 181,565,899 161,293,430 112,690,679 97,206,374
Marketing and
administrative ................... 6,749,237 4,471,563 3,834,289 2,415,155
Interest ........................... 5,229,669 4,457,797 2,278,544 1,832,037
Other .............................. 2,000,000
------------- ------------- ------------- -------------
195,544,805 170,222,790 118,803,512 101,453,566
Earnings before income:
taxes .............................. 3,533,882 3,092,823 921,671 2,262,446
Income taxes ......................... 300,000 200,000 125,000 150,000
------------- ------------- ------------- -------------
Net earnings ......................... $ 3,233,882 $ 2,892,823 $ 796,671 $ 2,112,446
============= ============= ============= =============

Operating Data:
Wheat used (bu.)
Durum ............................ 21,372,000 19,376,000 16,058,000 15,763,000
Spring .......................... 6,732,000 3,013,000 1,638,000 1,167,000
Shipments (cwt)
Semolina/flour ................... 11,168,000 10,085,000 8,718,000 8,088,000
Baking flour ..................... 2,599,000 634,000 -- --

1997 1996 1995 1994
------------- ------------- ------------- -------------
Balance Sheet Data (at end of period):
Working capital .................... $ (1,938,733) $ 3,338,206 $ 1,604,146 $ (4,703,152)
Net property and
equipment ........................ 69,130,520 59,233,046 43,395,670 19,739,029
Total assets ....................... 120,918,192 125,321,564 82,606,055 55,031,562
Long-term debt, including
current maturities ............... 61,214,270 54,000,000 33,750,000 19,000,000
Total equity ....................... 27,797,072 27,797,072 27,797,072 27,797,072

Other Data (1):
Pretax earnings .................... $ 3,533,882 $ 3,092,823 $ 921,671 $ 2,262,446

Book to tax differences ............ 2,375,920 (84,481) 123,844 (135,715)
------------- ------------- ------------- -------------
Tax basis earnings ................. $ 5,909,802 $ 3,008,342 $ 1,045,515 $ 2,126,731
============= ============= ============= =============

Bushels milled ..................... 28,103,677 22,390,011 17,696,689 16,930,702
============= ============= ============= =============

Earnings per bushel ................ $ 0.21 $ 0.13 $ 0.06 $ 0.13

Pro Forma Information (2)

Year Ended
May 31,
1997
-----------

Equity Participation Units Outstanding 4,787,000
Patronage rate $ 0.21
-----------

Earnings to holders $ 1,005,270
===========

(1) Because patronage dividends attributable to the Units will be allocated
based on the number of bushels of wheat delivered, information on
earnings per bushel is believed by the Company to be the most relevant
indicator of performance of the Wheat Milling Defined Business Unit.

(2) Based upon the actual number of Equity Participation Units outstanding
on May 31, 1997, the earnings of the Wheat Milling Defined Business
Unit which would have been allocated to the Equity Participation Units
are shown above under the caption "Pro Forma Information".

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

Consolidated Company

Results of Operations

Comparison of Year Ended May 31, 1997 with 1996

The Company's consolidated net earnings of approximately $52,600,000
for the year ended May 31, 1997 represents a $1,600,000 (3%) increase from 1996.
This increase is primarily attributable to improved gross margins and expanded

volume for refined oil products within the Company's Oilseed Processing and
Refining Defined Business Unit.

Consolidated net sales of $7,025,000,000 in 1997 decreased
$1,129,000,000 (14%). This decrease was due primarily to reduced grain volume of
400 million bushels, from 1.7 billion bushels in 1996 to 1.3 billion bushels in
1997. The reduced sales volume was partially offset by an increase in grain
price as a weighted average of all commodities sold which was 68 cents per
bushel greater in 1997 compared to 1996.

Patronage dividends increased $2,600,000 (20%) in 1997 compared to 1996
resulting from higher patronage earnings distributed by cooperative customers
and suppliers.

Other revenue of $68,600,000 was essentially unchanged in total from
1996, although there were significant changes in the components of this
category. Service revenues increased $6,800,000 in 1997, primarily because the
Myrtle Grove, LA export terminal was operated as part of the Company's
consolidated operations, whereas a year ago this facility operated as part of a
nonconsolidated joint venture. Expansion of the Company's fertilizer and
chemical application services contributed an additional $5,000,000 over the
prior year. These increases in revenue were offset by a net change in gains and
losses on disposal of fixed assets of $5,500,000 which includes a reserve for
the impairment of value of the Rush City, MN mill of $2,000,000, a decline of
$2,100,000 in interest income and net decreases in several other revenue
categories of $4,500,000.

Cost of goods sold of $6,968,000,000 decreased $1,108,000,000 (14%) in
1997. This decrease is primarily attributable to the decline in bushel volume of
approximately 400 million bushels, partially offset by an increase in the
weighted average cost of commodities from $4.16 per bushel in 1996 to $4.84 per
bushel in 1997.

Marketing and administrative costs of $63,300,000 declined $6,800,000
(10%) in 1997. The primary cause for this decrease is the elimination of such
costs related to the Consumer Products and Packaging Division of the Company
which was transferred to a nonconsolidated joint venture on August 30, 1996.
This transaction reduced such costs $9,000,000 in 1997.

Interest expense of $19,400,000 decreased $12,500,000 (39%) in 1997.
$14,600,000 of this decrease is substantially attributable to the grain volume,
grain price situation described in the discussion on cost of goods sold, which
produced lower inventory and receivable levels. This short-term interest
reduction was partially offset in the amount of $2,100,000 of additional
long-term interest expense, incurred primarily to finance property, plant and
equipment.

Income tax expense of $6,200,000 and $6,900,000 for 1997 and 1996,
respectively, results in effective tax rates of 10.5% and 11.9%. This decrease
in the effective tax rate is primarily attributable to an increase in patronage
earnings as a percentage of total pretax earnings.

Comparison of Year Ended May 31, 1996 with 1995

Consolidated net earnings of approximately $51,000,000 for the year
ended May 31, 1996 is a $6,000,000 increase from 1995. This increase is
attributed primarily to increased volumes of grain handled and increased returns
on investments.

Consolidated net sales of $8,154,000,000 in 1996 increased by
$3,097,000,000 (61%). This increase was due principally to grain volume of 1.7
billion bushels in 1996, an increase of 550 million bushels over 1995 and an
increase in grain price as a weighted average of all commodities sold which was
$4.21 for 1996, 56 cents per bushel greater than 1995.

Patronage dividends increased $6,800,000 (105%) in 1996 compared to
1995 resulting from higher patronage earnings distributed by cooperative
customers and suppliers.

Other revenues of $68,300,000 increased $10,700,000 (19%) in 1996. This
net increase was due primarily to an increase of $4,600,000 in service revenues,
from the Company's export facilities, and an increase in joint venture income of
$8,500,000, primarily from those joint ventures involved in the exporting of
grain, net of a $2,400,000 decrease in all other categories of other revenues,
including the write-down of investments totaling $1,100,000.

Cost of goods sold of $8,076,000,000 increased $3,094,000,000 (62%) in
1996. This increase is attributable primarily to an increase in the weighted
average cost of commodities of $4.16 in 1996 from $3.59 in 1995.

Marketing and administrative expenses were essentially flat compared to
1995. An expansion of the relative size of the Company's operations, which
increased costs in certain areas, was offset by a decrease in pension costs of
$4,000,000, principally caused by a settlement adjustment recognized in 1995.

Interest expense of $31,900,000 increased $12,600,000 (65%) in 1996.
This increase is substantially attributable to a $10,300,000 increase in
interest on short-term debt incurred to finance increased volumes at higher
prices and an increase of $3,200,000 in interest on long-term debt incurred
primarily for the expansion of property, plant, and equipment.

Income tax expense of $6,900,000 and $5,100,000 for 1996 and 1995,
respectively, results in effective tax rates of 11.9% and 10.2%. The increase in
the effective tax rate is primarily attributable to an increase in non-patronage
income during 1996.

Liquidity and Capital Resources

Cash Flows from Operations

Operating activities of the Company provided net cash of $271,600,000
for the year ended May 31, 1997, and used net cash of $105,700,000 and
$49,700,000 for the years ended in 1996 and 1995, respectively. Net cash
provided and used by operations is primarily attributable to changes in working
capital requirements with such balances decreasing $216,600,000 in 1997 and

thereby contributing cash, and increasing $154,200,000 and $103,700,000 in 1996
and 1995, respectively, thereby using net cash.

Cash Flows from Investing

For the years ended May 31, 1997, 1996, and 1995, the net cash flows
used in the Company's investing activities totaled $19,800,000, $37,600,000 and
$71,400,000, respectively. The acquisition of property, plant and equipment
comprised the primary use of cash in each of the three years, totaling
$42,400,000, $40,500,000, and $69,300,000 in 1997, 1996 and 1995, respectively.
Capital expenditures for fiscal year 1998 are expected to be $73,400,000.

In the year ended May 31, 1997, the Company received net cash from the
distribution of investments held in other cooperatives and joint ventures
totaling $20,600,000, which partially offset the cash used for capital
expenditures in that year.

On August 30, 1996 the Company formed a joint venture with a regional
consumer products packaging company, and contributed substantially all of the
net assets of the Consumer Products Packaging Division as its capital investment
in that joint venture. In return for these assets, the Company received a 40%
interest in the joint venture and the joint venture assumed debt of
approximately $33,700,000.

Cash Flows from Financing

The Company finances its working capital needs through short-term lines
of credit with the banks for cooperatives and commercial banks. As of May 31,
1997 the Company had short-term lines of credit totaling $550,000,000, all of
which is committed, and $98,000,000 was outstanding.

For the year ended May 31, 1997, the Company decreased its outstanding
seasonal borrowings by $226,000,000, corresponding with the decrease in working
capital requirements created primarily by a decline in inventory and accounts
receivable levels. For the years ended May 31, 1996 and 1995, the Company
increased outstanding seasonal borrowings by $124,000,000 and $87,000,000,
respectively, in order to fund the working capital needs caused by the increase
in grain volumes during those two years.

The Company has financed its long-term capital needs, primarily for the
acquisition of property, plant, and equipment, with long-term agreements through
the banks for cooperatives with maturities through the year 2007. Total
indebtedness of these agreements totaled $125,000,000 and $120,700,000 on May
31, 1997 and 1996, respectively. The Company also had long-term debt in the form
of capital leases, industrial development revenue bonds and miscellaneous notes
payable totaling approximately $9,500,000 and $11,900,000 on May 31, 1997 and
1996, respectively.

The Company borrowed on a long-term basis $18,800,000, $58,000,000 and
$51,000,000, and repaid long-term debt in the amounts of $17,400,000,
$11,300,000 and $5,900,000 in 1997, 1996 and 1995, respectively.

The Company anticipates further short-term financing needs to fund
increases in the volume of grain handled and further long-term needs to fund
acquisitions of grain facilities and for the expansion and development of
existing value-added businesses. Management believes such needs can be financed
with a combination of debt and equity.

In accordance with the bylaws and action of the Board of Directors,
annual net earnings form patronage sources are distributed to consenting patrons
following the close of each year and are based on amounts reportable for federal
income tax purposes as adjusted in accordance with the bylaws. The cash portion
of this distribution, deemed by the Board of Directors to be 30% of such
earnings for fiscal years 1996, 1995, and 1994 distributed in 1997, 1996 and
1995, respectively, totaled $13,200,000, $11,000,000 and $10,000,000. Cash
patronage for fiscal year 1997, to be distributed in fiscal year 1998, is
expected to be approximately $13,200,000 and is classified as a current
liability on the May 31, 1997 balance sheet.

The Board of Directors authorized the redemption of patronage
certificates held by patrons who were 72 years of age and those held by estates
of deceased patrons during the years ended May 31, 1997, 1996 and 1995. These
amounts totaled $8,200,000, $6,600,000 and $5,700,000, respectively.

During the year ended May 31, 1997, the Company offered securities in
the form of Equity Participation Units in its Wheat Milling and Oilseed
Processing and Refining Defined Business Units. These Equity Participation Units
give the holder the right and obligation to deliver to the Company a stated
number of bushels in return for a prorata share of the undiluted grain based
patronage earnings of these respective Defined Business Units. The offering
resulted in the issuance of such equity with a stated value of $13,870,000 and
generated additional capital and cash of $10,837,000, after issuance cost and
conversion privileges. Conversion privileges allowed a member to elect to use
outstanding patrons'equities for the payment of up to one-sixth the purchase
price of the Equity Participation Units.

Holders of the Units will not be entitled to payment of dividends by
virtue of holding such Units. However, holders of the Units will be entitled to
receive patronage refunds attributable to the patronage sourced income from
operations of the applicable Defined Business Unit on the basis of wheat or
soybeans delivered pursuant to the Member Marketing Agreement. The Board of
Directors' goal is to distribute patronage refunds attributable to the Units in
the form of 75% cash and 25% Patrons' Equities, and to retire those Patron
Equities on a revolving basis seven years after declaration. However, the
decision as to the percentage of cash patronage will be made each fiscal year by
the Board of Directors and will depend upon the cash and capital needs of the
respective Defined Business Units and is subject to the discretion of the Board
of Directors. The redemption policy will also be subject to change at the
discretion of the Board of Directors.

Oilseed Processing and Refining Defined Business Unit

Certain events and circumstances of which management has become aware
during or after the year ended May 31, 1997 which could negatively impact future
earnings and liquidity include the following:

The Oilseed Processing and Refining Defined Business Unit has conducted
facility

maintenance and new equipment installation during the first quarter of fiscal
1998 (the first quarter of fiscal 1998 is June 1,1997 through August 31, 1997),
which resulted in the disruption of production at the crushing portion of the
business and will have a negative impact on earnings for the period, the extent
of which is unknown at this time.

Results of Operations

Certain operating information pertaining to the Oilseed Processing and
Refining Defined Business Unit is set forth below, as a percentage of sales,
except processing margins.

Years Ended May 31,
-------------------
1997 1996 1995 1994
---- ---- ---- ----

Gross margin
percentage ..... 7.76% 7.33% 8.25% 6.91%
Marketing and
administrative . .98% 1.14% 1.29% 1.32%
Interest ......... 0.07% 0.04% -- 0.05%
Processing margins
Crushing/bu .... $ .59 $ .60 $ .59 $ .50
Refining/lb .... $.0173 $.0154 $.0149 $.0132

Because of the volatility of commodity prices, the Company believes
that processing margins are a better measure of the Defined Business Unit's
performance than gross margin percentages.

Comparison of Year Ended May 31, 1997 with 1996

The Oilseed Processing and Refining Defined Business Unit's net
earnings of $27,500,000 for the year ended May 31, 1997 represents a $4,500,000
increase (20%) compared to the same period in 1996. This increase is primarily
attributable to improved gross margins for refined oil products due to increased
demand.

Net sales of $441,700,000 for the year ended May 31, 1997 increased by
$42,400,000 (11%) compared to the same period in 1996. Volume increases in
processed soybean products, primarily soymeal and soyflour, contributed
$8,300,000 to sales and increased volumes of refined oil contributed
$11,100,000. Increased sales prices for soymeal and soyflour contributed
$44,900,000, offset by a decline in the sales prices for refined oil which
reduced total sales by $21,900,000.

Other revenues declined $3,100,000 for the year ended May 31, 1997
compared to 1996, primarily because of a loss of $2,000,000 on equipment to be
replaced as part of plant expansion and renovation during the summer of 1997, a
writedown of an investment of $250,000 and a reduction of income from an oilseed
joint venture of about $800,000.

Cost of goods sold for the year ended May 31, 1997 of $405,800,000
increased $34,400,000 (9%) compared to the year ended May 31, 1996. This
increase is primarily attributable to higher prices for soybeans partially
offset by a price decrease in purchased crude oil, and a reduction in plant
operating expenses of $1,700,000.

Marketing and administrative expenses declined $200,000 (4%) for the
year ended May 31, 1997 compared to 1996.

Interest expense increased approximately $170,000 (113%) for the year
ended May 31, 1997 compared to 1996. This increase is attributable primarily to
increased cost of soybeans compared to 1996, and the capital expenditures of
1997.

Income tax expense of $2,100,000 and $1,600,000 for 1997 and 1996,
respectively, results in effective tax rates of 7.1% and 6.5%. This increase in
the effective tax rate is the result of a higher percentage of nonpatronage
income for the Defined Business Unit in 1997.

Comparison of Year Ended May 31, 1996 with 1995

The Oilseed Processing and Refining Defined Business Unit's net
earnings of $23,000,000 for the year ended May 31, 1996 is a $3,200,000 decrease
in net earnings from the prior year. This decrease in net earnings is
attributable to an increase in cost of goods sold which could not entirely be
passed on to the customer due to competitive industry conditions.

Net sales of $399,300,000 increased by $1,200,000 in 1996 compared to
1995. Product volume increases, particularly refined oil, contributed $6,800,000
in additional sales, offset by a decline in overall average sale prices which
decreased net sales by $5,600,000.

Other revenues of $1,400,000 increased $200,000 (17%) compared to 1995.
This net increase was primarily attributed to an increase in income from an
oilseed joint venture.

Cost of goods sold of $371,400,000 in 1996 increased $5,000,000 (1.4%)
compared to 1995. Of this increase, $2,700,000 is due to increased volume of
production and $2,500,000 is due to increased prices of soybeans and crude
soybean oil. Plant expenses decreased by $200,000.

While the cost of raw materials (soybeans and soybean crude oil)
increased during the year on a per unit basis, the average sales price for
products declined because of an overall increase in production in the industry.
The increase in raw material costs could not be passed on in the form of higher
sales prices because of this competitive environment and is the primary cause
for the decline in gross margins and net earnings in 1996 when compared to 1995.

Marketing and administrative expenses declined by $600,000 in 1996.
This decrease largely results from additional pension expense of $600,000 in

1995 related to a benefit plan settlement adjustment which was allocated to all
Harvest States divisions.

The Defined Business Unit incurred interest expense of $152,000 in 1996
while in 1995 it incurred no such expense. This increase is attributable to
increased working capital requirements caused primarily by comparatively higher
inventory values caused by higher soybean and soybean oil prices and fixed asset
additions of $6,000,000 in 1996 which were partially financed by borrowings.

Income tax expense of $1,600,000 and $1,500,000 for 1996 and 1995,
respectively, results in effective tax rates of 6.5% and 5.4%. The increase in
the effective tax rate is the result of a higher percentage nonpatronage income
for the Defined Business Unit in 1996.

Liquidity and Capital Resources

The Oilseed Processing and Refining Defined Business Unit's cash
requirements result from capital improvements and from a need to finance
additional inventories and receivables based on increased raw material costs or
levels. These cash needs are expected to be fulfilled by the Company.

Cash Flows from Operations

Operating activities for the years ended May 31, 1997, 1996 and 1995
provided cash of $23,600,000, $14,400,000, and $44,900,000, respectively. Net
earnings of $27,500,000, $23,000,000, and $26,200,000 in 1997, 1996 and 1995,
respectively, were offset by an increase in working capital requirements in 1997
of $7,800,000, and in 1996 of $10,200,000. In 1995, a decrease in working
capital requirements of $16,900,000 contributed cash.

Cash Flows Used for Investing

Net cash flows used in the Oilseed Processing and Refining Defined
Business Unit's investing activities for the years ended May 31, 1997, 1996 and
1995 were $12,100,000, $6,000,000, and $2,600,000, respectively. Essentially all
of these cash usages were for the acquisition of property, plant and equipment.
Capital expenditures for fiscal year 1998 are expected to be $18,600,000.

Cash Flows from Financing Activities

The Defined Business Unit's financing activities are coordinated
through the Company's cash management department. Cash from all of the Company's
operations is deposited with the Company's cash management department and
disbursements are made centrally. As a result, the Defined Business Unit has a
zero cash position. Financing is available from the Company to the extent of the
Company's working capital position and corporate loan agreements with various
banks, and cash requirements of all other Company operations.

Working capital requirements for a Defined Business Unit are reviewed
on a periodic basis, and could potentially be restricted based upon

management's evaluation of the prevailing business conditions and availability
of funds.

Debt outstanding and payable to the Company as of May 31, 1997 and 1996
was $25,600,000 and $9,500,000, respectively. These interest bearing balances
reflect working capital and fixed asset financing requirements at the end of the
respective years.

Wheat Milling Defined Business Unit

Certain events and circumstances of which management has become aware
of during or after the year ended May 31, 1997 which could negatively impact
future earnings and liquidity include the following:

In March 1997, it was reported that Borden (which represented 23.0% and
23.8% of the Wheat Milling Defined Business Unit's semolina and durum flour
sales in the years ended May 31, 1997 and 1996, respectively) was closing five
of its ten North American pasta manufacturing plants. Four of the plants to be
closed are customers of the Wheat Milling Defined Business Unit. Since that
time, one of the five plants scheduled for closure has in fact closed; the other
four plants have continued to operate at reduced volumes, apparently in
anticipation of closure or divestiture by Borden. A substantial portion (44.4%
and 31.5% for 1997 and 1996, respectively) of the production of the Company's
Rush City facility has in the past been sold to the two Minnesota plants (until
recently, owned by Borden) currently operating at reduced volumes. Because of
this reduced demand from the Borden plants and because there are no other large
pasta manufacturing plants located in geographical proximity to Rush City, the
Company elected to close the Rush City facility in late May 1997 and throughout
the month of June. In early July 1997, the Company reopened the facility and has
operated one milling line to provide durum flour to other customers. During the
month of July 1997, the Rush City mill operated at approximately one-third of
its normal production volumes. The Company continued to provide a portion of the
Borden plant's semolina requirements from its Kenosha mill. The continuation of
that business both in terms of volume and duration is uncertain.

It has been reported that Borden has sold its Minnesota pasta plants to
an employee/investor group. A high degree of uncertainty will continue to exist
regarding the level of semolina demand required by the new company, and
consequently, the level of production at which the Rush City mill will operate
into the future.

Although the Company is unable to predict the precise effect on its
operations which will result from closure or sale of the Borden plants, it has
determined that whatever the eventual resolution, the impact is likely to be
negative on its Rush City mill. Consequently, the Company has assessed the
carrying value of the Rush City mill relative to expected future cash flows and
has recognized a $2,000,000 charge to continuing operations for the year ended
May 31, 1997 as a result of the impaired value of this facility.

The Company may elect to sell the Rush City facility, close the
facility, or operate at reduced capacity, depending upon the opportunities
offered by the market place.

While a March 1997 mill start-up had been anticipated for the Houston
mill,

equipment installation delays resulted in the mill's production not starting
until June 1997. Currently the facility's volume of bulk flour shipments is less
than 50% of its 14,000 cwt. per day capacity. As the customer base grows, and
with the recently completed installation of an automated flour packaging line
for domestic and export flour, it is expected that the mill will be at full
capacity by December 1997.

Results of Operations

Certain operating information pertaining to the Defined Business Unit
is set forth below, as a percentage of sales, except for margins/cwt.

Years Ended May 31,
-------------------
1997 1996 1995 1994
---- ---- ---- ----

Gross margin
percentage ....... 8.80% 6.94% 5.88% 6.28%
Marketing and
administrative ... 3.39% 2.58% 3.20% 2.33%
Interest ........... 2.63% 2.57% 1.90% 1.80%
Margins/cwt ........ $ 1.27 $ 1.12 $.81 $ .80

Because of the volatility of commodity prices, the Company believes
that margins per hundred weight (manufacturing margins) are a better measure of
the Defined Business Unit's performance than gross margin percentages.

Comparison of Year Ended May 31, 1997 with 1996

The Defined Business Unit's net earnings of $3,200,000 for the year
ended May 31, 1997 increased $300,000 (10%) over 1996. This increase in net
earnings is attributable primarily to higher volumes of production at improved
gross margins for flour products, offset by a $2,000,000 loss on the impairment
of fixed asset value at the Rush City, Minnesota mill. Because of the
uncertainty of future business volumes and margins to be generated by this mill,
management assessed the carrying value of these assets against projected cash
flows and recognized the resulting loss in conformity with Statement of
Financial Accounting Standards (SFAS) No. 121.

Net sales for the year ended May 31, 1997 of $199,100,000 increased
$25,800,000 (15%) from 1996. This increase is primarily the result of an
increase in total volume of product sold, partially offset by an overall
reduction in sales price per cwt.

Cost of goods sold of $181,600,000 increased $20,300,000 (13%) from
1996. Raw material costs increased $17,500,000 due to a 25% increase in bushels
milled, from 22.4 million bushels in 1996 to 28.1 million bushels in 1997,
partially offset by an

average decrease of 74 cents per bushel for durum and wheat. Plant expenses
increased $2,800,000 in 1997, primarily due to a full year of operations at the
Kenosha mill compared to a half year in 1996.

Marketing and administrative expenses were $6,700,000 in 1997, an
increase of $2,200,000 (49%) from 1996. This increase reflects a full year of
activity for the Kenosha mill while 1996 represented a half year as that mill
began operations in November 1995, as well as some additional staffing and
system expansion costs in anticipation of the future volumes from the Houston
mill which began limited operation in June 1997.

The Defined Business Unit incurred interest expense of $5,200,000 in
1997 compared to $4,500,000 in 1996. This increase of $700,000 (16%) is
primarily related to the long-term debt used to finance the Kenosha mill.

Comparison of Year Ended May 31, 1996 with 1995

The Defined Business Unit's net earnings of $2,900,000 for the year
ended May 31, 1996 increased $2,100,000 over 1995. This increase in net earnings
is attributable to higher volumes, largely the result of increased processing
capacity generated by the opening of the Kenosha milling facility during the
fiscal year 1996, and higher sales prices.

Net sales of the Defined Business Unit of $173,300,000 increased by
$53,600,000 (45%) from 1995, due to an increase in shipments of semolina and
flour from 8,720,000 cwt to 10,720,000 cwt and an increase in the average price
per cwt from $11.03 in 1995 to $12.64 in 1996.

Cost of goods sold of $161,300,000 increased $48,600,000 (43%) from
1995. Raw material costs increased $46,000,000 due to an average increase of 83
cents per bushel for durum and wheat and a 38% increase in bushels sold of 6.7
million bushels, from 17.7 million bushels in 1995 to 24.4 million bushels in
1996. Plant expenses increased $2,600,000 in 1996, essentially all due to
operations of the Kenosha mill, which did not begin milling until late 1995.

Marketing and administrative expenses were $4,500,000 in 1996 an
increase of $700,000 from 1995. This increase is attributable primarily to an
increase of $900,000 due to staffing and system expansion to handle the
additional volumes generated by the Kenosha mill, offset by a decrease of
approximately $200,000 in pension expense related to a benefit plan settlement
adjustment in 1995.

The Defined Business Unit incurred interest expense of $4,500,000 in
1996 compared with $2,300,000 in 1995. This increase was attributable to
increased short-term borrowings used to finance higher inventories and
receivables primarily the result of production from the Kenosha mill and
increased long-term debt used to finance construction of the Kenosha mill.

Liquidity and Capital Resources

The Defined Business Unit's cash needs are primarily the result of
continued capital additions. The Defined Business Unit's Kenosha plant, which
began operations in late 1995, represented an investment of $39,000,000. The
Defined Business Unit's Houston plant, which began limited operations in June
1997, is expected to represent an investment of $17,700,000. In addition, the
Harvest States Board of Directors has increased the authorized expenditures for
the Pocono plant from $38,800,000 to $41,350,000. The Defined Business Unit
expects capital additions to all its facilities.

Commencement of operations at a particular facility involves increased
working capital to fund required inventories and receivables related to
increased sales. In addition, increased carrying value of inventories and
receivables because of higher prices, increased receivables because of slow
collections or increased inventories above historical levels requires additional
financing.

All of the Defined Business Unit's financing needs are expected to be
met by the Company.

Cash Flows from Operations

Operating activities provided net cash of $19,600,000 in the year ended
May 31, 1997, used net cash of $16,200,000 in 1996, and provided net cash of
$7,800,000 in 1995, generally attributable to working capital needs, namely a
decrease in working capital requirements in 1997 of $10,200,000, an increase in
working capital requirements of $22,400,000 in 1996, and a decrease in working
capital requirements of $4,500,000 in 1995. Cash requirements were offset by net
earnings of $3,200,000, $2,900,000 and $800,000 in 1997, 1996 and 1995,
respectively, and depreciation and amortization of $4,100,000, $3,300,000 and
$2,500,000 in 1997, 1996 and 1995, respectively. For the year ended May 31, 1997
the reserve for obsolescence of the Rush City mill is also a noncash expense and
therefore an offset to cash used.

Cash Flows Used from Investing

Net cash flows used in the Defined Business Unit's investing activities
for the years ended 1997, 1996 and 1995 were $15,000,000, $18,600,000 and
$30,700,000, respectively. Expenditures for the construction or acquisition of
property, plant and equipment were $15,000,000, $18,100,000, and $25,100,000 for
the years ended May 31, 1997,1996, and 1995, respectively. The Defined Business
Unit also acquired intangibles of $500,000 and $5,600,000 in 1996 and 1995,
respectively, related to the elimination of a minority interest effective June
1, 1994.

Capital expenditures for fiscal year 1998 are expected to be
$37,600,000, which includes $30,000,000 for the construction of the mill in
Pocono, Pennsylvania. The total cost of construction of the Pocono mill is
expected to be $41,350,000. The 1998 expected capital expenditures also include
$4,100,000 for the completion of the construction of the Houston mill. The total
cost of construction of the Houston mill is expected to be $17,700,000.

Cash Flows from Financing Activities

The Defined Business Unit's financing activities are coordinated through
the Company's cash management department. Cash from all of the Company's
operations is deposited with the Company's cash management department and
disbursements are made centrally. As a result, the Defined Business Unit has a
zero cash position. Financing is available from the Company to the extent of the
Company's working capital position and corporate loan agreements with various
banks and cash requirements of all other Company operations.

Working capital requirements for each division and Defined Business
Unit of the Company are reviewed on a periodic basis, and could potentially be
restricted based upon management's evaluation of the prevailing business
conditions and availability of funds.

Short-term debt outstanding and payable to the Company as of May 31,
1997 and 1996 was $22,400,000 and $31,000,000, respectively. These interest
bearing balances reflect working capital and fixed asset financing requirements
of the respective years.

On May 31, 1997 and 1996 the Defined Business Unit's long-term debt was
$61,200,000 and $54,0000,000, respectively. This debt was incurred by the
Defined Business Unit to retire debt assumed with the acquisition of the Huron
facility in year ended May 31, 1990, to expand the Huron facility in the years
ended May 31, 1990 and 1991, to construct the Kenosha facility in the years
ended May 31, 1995 and 1996, and for the construction of the Houston facility in
the years ended May 31, 1996 and 1997.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements listed in 14(a)(1) follow the signatures.
Registrant is not required to provide the supplementary financial information
required by Item 302.

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

Not applicable.

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Board of Directors

The table below lists the current directors of the Company, consisting
of four members from District One (comprised of the states of Minnesota,
Illinois, Iowa and Wisconsin), four members from District Two (comprised of the
state of North Dakota), two members from District Three (comprised of the states
of South Dakota, Kansas and Nebraska), two members from District Four (comprised
of the states of Montana and Wyoming) and two members from District Five
(comprised of the states of Washington, Oregon, Utah and Idaho). (In addition

to the states referenced above, the Board of Directors has temporarily assigned
the State of Missouri to District One, the States of Texas and Oklahoma to
District Three, and the State of Colorado to District Four.) Each director must
be an agricultural producer and an active patron of the Company (either directly
or through an Affiliated Association) for a period of five years at the time of
the director's election, must be less than 68 years of age at the time of
election and cannot be an employee of the Company or of an Affiliated
Association. The directors have been elected for staggered three-year terms,
expiring in November of the years listed in the table below. Each director has
been an agriculture producer for the past five years.

Term
Director Expires
Name and Address Age District Since in Nov.
- ---------------- --- -------- ----- -------

Steven Burnet 56 5 1983 1998
94699 Monkland Lane
Moro, OR 97039-9705

Steve Carney 46 4 1988 1997
P.O. Box 1122
Scobey, MT 59263-1122

Edward Ellison 61 1 1978 1999
RR 1, Box 46
Elbow Lake, MN 56531-9740

Sheldon Haaland 58 1 1984 1997
RR 2, Box 55
Hanley Falls, MN 56245-9731

Jerry Hasnedl 50 1 1995 1998
RR 1, Box 39
St. Hilaire, MN 56754

Edward Hereford 58 5 1983 1997
RR 1, Box 53
Thornton, WA 99176-9710

Gerald Kuster 62 2 1979 1997
RR 1, Box 46
Reynolds, ND 58275-9742

Leonard Larsen 61 2 1993 1999
RR 1, Box 88
Granville, ND 58741

Tyrone Moos 59 3 1991 1997
HCR 1, Box 1
Phillip, SD 57567-9601

Duane Risan 61 2 1989 1998
RR 1, Box 4
Parshall, ND 58770-9703

Duane Stenzel 51 1 1993 1999
RR 2, Box 173
Wells, MN 56097

Russell Twedt 47 4 1993 1999
P.O. Box 296
Rudyard, MT 59540-0296

Merlin Van Walleghen 61 3 1993 1999
RR 1, Box 188
Letcher, SD 57359

William Zarak 62 2 1983 1998
3711 124th Ave. S.W.
South Heart, ND 58655-9767

Approximately one-third of the directors are elected annually by
members acting through delegates.

STEVEN BURNET. Mr. Burnet has been a director since 1983 and currently
serves as Chairman of the Board. He grows dryland wheat and barley and supports
a cow/calf and yearling operation. Mr. Burnet is a member of the Oregon Wheat
Growers League and the Oregon Cattlemen's Association. He also serves as a
director on the Agricultural Co-op Council of Oregon.

STEVE CARNEY. Mr. Carney has been a director since 1988 and currently
serves as Secretary Treasurer. Mr. Carney operates a spring wheat and durum farm
with his wife and brother. He is a former president of Farmers Union Grain
Company (Peerless) and Farmers Union Grain Terminal of Daniels County. He is
also a member of several local cooperatives.

EDWARD ELLISON. Mr. Ellison has been a director since 1978. Together
with his sons, he raises wheat, soybeans and corn on his Grant County,
Minnesota, farm. Mr. Ellison is on the board of the Minnesota Association for
Cooperatives and an alternate to the Agricultural Cooperative Development
International (ACDI) board of directors. He also serves as a member of the
Farmland Insurance and the Ag Utilization Research Institute (AURI) boards of
directors.

SHELDON HAALAND. Mr. Haaland has been a director since 1984 and
currently serves as Assistant Secretary and Treasurer. He and his family farm
550 acres of corn, soybeans and wheat. Mr. Haaland is a member of several
cooperatives and has previously served on the boards of Cottonwood Co-op Oil
Company and Western Transport Co-op and as an advisory board member of the
Southwest State University Co-op Program.

JERRY HASNEDL. Mr. Hasnedl has been a director since 1995. He farms

wheat, barley, sunflowers, corn, alfalfa and registered seed for MCIA. Mr.
Hasnedl is a member of several cooperatives as well as the Minnesota Crop
Improvement Association and Minnesota Farmers Union. He also is a farmer/dealer
for Northrup King Seeds.

EDWARD HEREFORD. Mr. Hereford has been a director since 1983. He and
his two sons produce wheat, barley, peas and lentils on his dryland farm. Mr.
Hereford is a director of the Idaho Co-op Council, a board member of the ACDI
and a member of the Thornton Grange, the Washington Association of Wheat Growers
and the Washington Association of Peas and Lentils Growers.

GERALD KUSTER. Mr. Kuster has been a director since 1979. He and his
sons operate a 3,000-acre farm. Mr. Kuster is President of Agri City Cooperative
Services in Grand Forks, North Dakota, and Central Valley Bean Cooperative in
Buxton, North Dakota. He also serves as president of Reynolds United
Cooperative.

LEONARD LARSEN. Mr. Larsen has been a director since 1993. He farms a
1,440-acre grain and sunflower operation and is vice president of the Granville
area Development Corp. Mr. Larsen is also a member of Dakota Growers Pasta
Company.

TYRONE MOOS. Mr. Moos has been a director since 1991 and currently
serves as Second Vice Chairman. He and his wife, together with their son and
son-in-law, operate a combination farm and ranch raising winter wheat, barley
and millet as well as managing cow-calf and hog finishing operations. Mr. Moos
is a former member of the local co-op elevator board.

DUANE RISAN. Mr. Risan has been a director since 1989. He raises durum,
spring wheat and barley and, as a former educator, has a degree in mathematics
and education from Jamestown College. He is a member of Dakota Growers Pasta
Company and a patron of Dakota Quality Grain Co-op.

DUANE STENZEL. Mr. Stenzel has been a director since 1993. He raises
620 acres of sweet corn, corn and soybeans on his south central Minnesota farm.
Mr. Stenzel is a board member of Grainland Cooperative and past president of the
Wells Farmer Elevator.

RUSSELL TWEDT. Mr. Twedt has been a director since 1993. He is a
third-generation Hill County farmer and rancher, and he and his family raise
wheat and barley, with a cow/calf operation. He is a member of the Montana Grain
Growers Association and Montana Farmers Union.

MERLIN VAN WALLEGHEN. Mr. Van Walleghen has been a director since 1993.
He and his son raise corn and soybeans and operate a livestock finishing
operation. He is a past Board president of the Mitchell Farmers Cooperative
Elevator Association and past member of Mitchell Technical Institutes
Agricultural Advisory Board. He is also Chairman of the Sanborn County
Development Board.

WILLIAM ZARAK. Mr. Zarak has been a director since 1983 and currently
serves as First Vice Chairman. He owns and operates a 2,000-acre farm with his
wife and two sons where they raise small grains, corn, beef cows and hogs and
also backgrounds calves. Mr. Zarak is also a member of Dakota Growers Pasta

Company.

Directors' Compensation

The Board of Directors meets monthly. The Company provides its
directors with annual compensation of $24,000, paid in twelve monthly payments,
with the Chairman of the Board receiving an additional annual compensation of
$6,000, paid in twelve monthly payments, a per diem payment of $122.50 plus
travel allowance for actual days away from home while attending Board Meetings,
a per diem of $250 plus actual expenses and travel allowance for each day spent
on other Company business, life insurance, and an annuity plan providing for
benefits to become payable monthly when a director reaches age 62.

Committees of the Board of Directors

The Board of Directors does not have any standing committees. The Board
appoints ad hoc committees from time to time to review certain matters and make
reports and recommendations to the full Board of Directors for action. The
entire Board of Directors determines the salary and incentive compensation of
the Chief Executive Officer and reviews the results and scope of the audit and
other services provided by the Company's independent auditors, as well as the
Company's accounting principles and its system of internal controls.

Compensation Committee Interlocks and Insider Participation

As noted above, the Company's Board of Directors does not have a
Compensation Committee. The entire Board of Directors determines the
compensation of the Chief Executive Officer and the terms of the employment
agreement with the Chief Executive Officer. The Chief Executive Officer
determines the compensation for all other executive officers.

Limitation of Liability and Indemnification

The Company's Articles of Incorporation limit the liability of
directors in their capacity as directors to the full extent permitted by
Minnesota law. As permitted by Minnesota law, the Company's Articles of
Incorporation provide that a director shall not be personally liable to the
Company or its members for monetary damages for breach of fiduciary duty as a
director, except for liability for a breach of the director's duty of loyalty to
the Company or its members, for acts of omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, for a transaction
from which the director derived an improper personal benefit or for an act or
omission occurring prior to the date when such provisions became effective.

The provision of the Articles of Incorporation limits only the
liability of directors, not officers. These provisions do not affect the
availability of equitable remedies, such as an action to enjoin or rescind a
transaction involving a breach of fiduciary duty, although, as a practical
matter, equitable relief may not be available. The above provisions also do not
limit liability of the directors for violations of, or relieve them from the
necessity of complying with, the federal securities laws.

The Bylaws of the Company require the Company to indemnify each
director, officer, manager, employee or agent of the Company, and any person

serving at the request of the Company as a director, officer, manager, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses, including attorneys' fees, judgments, fines and
amounts paid in settlement actually and reasonably incurred to the fullest
extent permitted under the laws of Minnesota.

Executive Officers

The table below lists the executive officers of the Company, none of
whom holds any equity in the Company. Officers are elected annually by the Board
of Directors.

Name Age Position
---- --- --------

John D. Johnson 48 President and Chief Executive Officer

T. F. Baker 54 Group Vice President - Finance

Michael H. Bergeland 52 Group Vice President - Grain & Agri Services

Garry A. Pistoria 55 Group Vice President - Wheat Milling

James Tibbetts 47 Group Vice President - Oilseed Processing and Packaging

JOHN D. JOHNSON. Mr. Johnson was appointed President and Chief
Executive Officer on January 1, 1995. Prior to his appointment to that position
he held positions as Group Vice President of Farm Marketing & Supply, GTA Feeds
Division General Manager, Director of Sales and Marketing for the GTA Feeds
Division, Regional Sales Manager for GTA Feeds Division, and Feed Consultant GTA
Feeds Division. He has 20 years total experience with the Company. Mr. Johnson
graduated in 1970 from Black Hills State University at Spearfish, South Dakota,
with a degree in Business Administration and Economics. He also serves on the
Board of Directors of the National Council of Farmer Cooperatives (NCFC) and A.
C. Toepfer Intrade Grain Companies, and is Chairman of the NCFC Agriculture,
Trade & Credit Committee. Mr. Johnson also serves on the Management Committee
for Ventura Foods, LLC.

THOMAS F. BAKER. Mr. Baker joined the Company in 1982 as Vice President
of Finance. In 1992 he was appointed Group Vice President of Finance and holds
that position at the present time. Mr. Baker obtained a Bachelor's Degree in
accounting from the College of St. Thomas, did graduate work at the University
of Minnesota, and obtained his CPA in the State of Minnesota. Mr. Baker serves
on the Board of Governors for Ag States Agency, LLC and on the Management
Committee for Ventura Foods, LLC. He is also a member of Minnesota Certified
Public Accountants and Financial Executives Institute.

MICHAEL H. BERGELAND. Mr. Bergeland, Group Vice President of Grain and
Agri-Services, joined the Company in 1967. He is a native of Minnesota and
attended Moorhead State College. Mr. Bergeland also serves as a board member of
the Minneapolis Grain Exchange, Chairman of the Grain Committee for the National
Council of Farmer Cooperatives, and a Committee Member and alternate director
for A.C. Toepfer Intrade Grain.

GARRY A. PISTORIA. Mr. Pistoria has been Group Vice President of Wheat
Milling since 1985 and has been with the Company since 1961. Mr. Pistoria
attended Montana State University and the College of Great Falls. He is a member
of the National Pasta Association, the American Bakers Association and the
Minneapolis Grain Exchange.

JAMES TIBBETTS. On January 1, 1997, Mr. Tibbetts was appointed to the
position of Group Vice President of the Oilseed Processing and Refining
Division. From November of 1995 (when he joined the Company) through 1996, Mr.
Tibbetts was Senior Vice President for the former Consumer Products Packaging
Division (Holsum Foods Division). From 1977 to 1995, Mr. Tibbetts was a Senior
Vice President for Farm Credit Leasing in Minneapolis, Minnesota. Mr. Tibbetts
received a Bachelor of Science Degree in Business Administration in 1972 from
Northern State University in Aberdeen, South Dakota. He serves on the Management
Committee for Ventura Foods, LLC.

ITEM 11. EXECUTIVE COMPENSATION

Summary Compensation. The following table sets forth the cash and
noncash compensation earned by the Chief Executive Officer and each of the four
most highly compensated executive officers of the Company (other than the Chief
Executive Officer) whose total salary and bonus or similar incentive payment
earned during the year ended May 31, 1997, exceeded $100,000 (the "Named
Executive Officers"):

Summary Compensation Table

Annual Compensation
-------------------------------------------------------------
Year Ended Other Annual All Other
May 31, Salary(1) Bonus(1) Compensation(2) Compensation(3)
------- --------- -------- --------------- ---------------

John D. Johnson
President and Chief
Executive Officer .. 1997 $500,000 150,000 $ 7,172 $ 7,186

Thomas F. Baker
Group Vice President--
Finance ............ 1997 235,000 122,200 9,226 6,036

Michael H. Bergeland

Group Vice President--
Grain and Agri-
Services ........... 1997 224,000 120,000 7,048 7,890

Garry A. Pistoria
Group Vice President--
Wheat Milling ...... 1997 180,000 90,000 6,905 5,474

James Tibbetts
Group Vice President--
Oilseed Processing
and Refining
Division ........... 1997 160,000 80,000 5,699 2,882

- --------------------

(1) Amounts shown include amounts deferred at the employee's election under
the Company's Deferred Compensation Program.

(2) Amounts shown include personal use of a Company vehicle.

(3) Other compensation includes the Company's matching contributions under
the Company's 401(K) Plan and the portion of group term life insurance
premiums paid by the Company.

On January 23, 1997, the Company entered into an Employment Agreement
with John D. Johnson. The Employment Agreement provides for a rolling three-year
period of employment commencing on January 23, 1997, at an initial base or fixed
salary of at least $500,000, subject to annual review. Mr. Johnson's employment
may be terminated by either party on at least 30 days' written notice, subject
to the rights and obligations set forth in the Employment Agreement. The Company
is obligated to pay Mr. Johnson a severance allowance for three years equal to
Mr. Johnson's base or fixed salary and to continue family health insurance
coverage for at least one year in the event Mr. Johnson's employment is
terminated for any reason other than for cause (as such term is defined in the
Employment Agreement), death, disability or voluntary termination. The
Employment Agreement also contains covenants by Mr. Johnson not to compete with
the Company and not to solicit the Company's customers or employees during the
period that Mr. Johnson accepts the severance allowance. The Company and Mr.
Johnson have also agreed that in the event of Mr. Johnson's voluntary
termination the Company will not owe Mr. Johnson any severance allowance and Mr.
Johnson will not compete against the Company for a period of three years. Either
party may terminate the Employment Agreement and all of the rights and
obligations of the parties thereunder, upon at least three years' written notice
to the other party.

Management Compensation Incentive Program

Each Named Executive Officer is eligible to participate in the
Management Compensation Incentive Program (the "Incentive Program") for the year
ending May 31, 1997. The Incentive Program is based on Company and group or
division performance. The criteria for measurement consists of Economic Value
Added (EVA), earnings and Member Value Index; a subjective evaluation of value
provided to members and customers. These amounts were paid after May 31, 1997.
The maximum incentive is 60% of base compensation.

Retirement Plan

Each of the Named Executive Officers is entitled to receive benefits
under the Harvest States Cooperatives Cash Balance Retirement Plan (the
"Retirement Plan"). An employee's benefit under the Retirement Plan depends on
credits to the employee's account, which are based on the employee's total
salary each year the employee works for the Company, the length of service with
the Company and the rate of interest credited to the employee's account balance
each year. Credits are made to the employee's account from Pay Credits, Special
Career Credits and Investment Credits.

The amount of Pay Credits added to an employee's account each year is a
percentage of the employee's gross salary, including overtime pay, commissions,
severance pay, bonuses, any compensation reduction pursuant to the 401(K) Plan
and any pretax contribution to any of the Company's welfare benefit plans, paid
vacations, paid leaves of absence and pay received if away from work due to a
sickness or injury. The Pay Credits percentage received is determined on a
yearly basis, based on the years of Benefit Service completed as of January 1 of
each year. An employee receives one year of Benefit Service for every calendar
year of employment in which the employee completed at least 1,000 hours of
service.

Effective January 1, 1997, Pay Credits are earned according to the following
schedule:

Years of Benefit Service: Pay Credit Equals:
------------------------- ------------------
1 to 7 years 4% of total salary
8 to 11 years 5% of total salary
12 years and more 6% of total salary

Special Career Credits were designed to supplement the benefits of
mid-career employees affected by the change from the former plan to the current
Retirement Plan. Employees qualify for Special Career Credits only if they were
employed by the Company and met certain age and service requirements (as defined
by the Retirement Plan) on January 1, 1988. The following table shows the
credits for those who qualify:

Total of Age and Benefit
Service on January 1, 1988: Special Career Credits:
--------------------------- -----------------------
50 to 54 1% of total salary
55 to 59 2% of total salary
60 to 64 3% of total salary

65 to 69 4% of total salary
70 or more 5% of total salary

Special Career Credits continue at the percentage rate determined from the
employee's status on January 1, 1988, for as long as the employee is with the
Company.

The Company credits an employee's account at the end of the year with
an Investment Credit based on the balance at the beginning of the year. The
Investment Credit is based on the average return for one-year U.S. Treasury
Bills for the preceding 12-month period. The maximum Investment Credit will not
exceed 12% for any year.

As of December 31, 1996, the dollar value of the account of each of the
Named Executive Officers was:

John D. Johnson .................. $180,334

Thomas F. Baker .................. 215,878

Michael H. Bergeland ............. 379,744

Garry A. Pistoria ................ 441,761

James Tibbetts ................... 2,258

Mr. Pistoria and Mr. Bergeland could be eligible for a retirement
benefit, under a grandfather provision of a prior provision of the plan, instead
of the above amount. Such amount would be affected by age at retirement and
salary.

Deferred Compensation Plan

Effective April 1, 1994, the Company established the Harvest States
Cooperatives Deferred Compensation Plan (the "Deferred Compensation Plan").
Participants in the Deferred Compensation Plan are select management or highly
compensated employees of the Company who have been designated as eligible by the
President of the Company to participate in such plan. Under the Deferred
Compensation Plan, a participant may elect to have an amount of deferred
compensation credited to the participant's account for the applicable Plan Year
(as defined in the Deferred Compensation Plan). The compensation actually earned
during the Plan Year by a participant who elects deferred compensation is
reduced by the percentage or amount so elected. A participant may elect to
contribute no more than 30% of each payment of base compensation, provided that
the percentage selected is expected to result in annual contributions totaling
at least $1,000. Also, the participant may elect to contribute either a
percentage or a specific dollar amount of any bonus or similar incentive payment
that may become payable during the Plan Year, provided the contribution will not
be less than the smaller of $1,000 or 100% of the bonus payable. The deferred
compensation credited under the Deferred Compensation Plan is allocated to the
account of the participant as of the date that the compensation would otherwise
have been paid to the Participant in cash. Income is credited to each account
each Plan Year at an annual rate equal to 1% over the five-year U.S. Treasury

Bond rate as of October 1 of the year preceding the Plan Year, as adjusted as
appropriate to reflect contributions to and distributions from the account
during the Plan Year.

A participant's credits to his or her account are unsecured obligations
of the Company to pay the participant the actual amount of the credits upon
distribution pursuant to the Deferred Compensation Plan. Each participant or
beneficiary is only a general creditor of the Company with respect to his or her
account. Accounts are maintained for recordkeeping purposes only. Obligations of
the Company to pay benefits under the Deferred Compensation Plan may be
satisfied by distributions from a grantor trust created by the Company in its
sole discretion for such purpose. The Company has not created any such trust.

Amounts credited to a participant's account are distributed on a
predetermined date, such as the date of retirement or the date the participant
attains a particular age, in either a lump sum or in installments pursuant to
the participant's prior irrevocable election. The Deferred Compensation Plan
also provides for distribution upon the participant's death or disability, for
unforeseeable emergencies and upon termination of the plan.

The President of the Company may at any time amend the Plan in whole
or in part for any reason. No amendment may decrease the benefits under the Plan
which have accrued prior to the date of such amendment, but any amendment may
modify the interest rate to be used for future deferrals and for the balance in
each account on the date the amendment was adopted. The Company, by action of
the President, may at any time terminate the Plan.

401(k) Plan

Each Named Executive Officer is eligible to participate in the Harvest
States Cooperatives Savings Plan (the "401(k) Plan"). All employees of the
Company who are eligible for the Retirement Plan and who are not production
employees and who are not covered by a collective bargaining agreement are
eligible to participate in the 401(k) Plan. Effective January 1, 1997
participants may contribute between 1% and 15% (not to exceed 8% in the case of
"highly compensated" employees) of their pay on a pre-tax basis. Each of the
Named Executive Officers is a "highly compensated" employee. The Company matches
50% of the first 6% of pay contributed each year. The Company's Board of
Directors may elect to reduce or eliminate matching contributions for any year
or any portion thereof. Participants are 100% vested in their own contributions
and in any Company matching contribution made on the participant's behalf.

Deferred Compensation Supplemental Retirement Plan

Each of the Named Executive Officers may participate in the Harvest
Sates Cooperatives Deferred Compensation Supplemental Retirement Plan (the
"Supplemental Plan"). Participants in the Supplemental Plan are select
management or highly compensated employees of the Company who have been
designated as eligible by the President of the Company to participate in such
plan. Compensation deferred under the Deferred Compensation Plan is not eligible
for Pay Credits or Special Career Credits under the Cash Balance Retirement Plan
or matching contributions under the 401(k) Plan. The Supplemental Plan is
intended to replace the benefits lost under those plans due to Section 415 of
the Internal Revenue Code of 1986, as amended (the "Code") which cannot be

considered for purposes of benefits due to Section 401(a)(17) of the Code under
the qualified plans that the Company offers. The Supplemental Plan is not funded
or qualified for special tax treatment under the Code. As of December 31, 1996,
the dollar value of the account of each of the Named Executive Officers will be
approximately:

John D. Johnson ...................... $94,772

Thomas F. Baker ...................... 62,161

Michael H. Bergeland ................. 526,035

Garry A. Pistoria .................... 723,252

James Tibbetts ....................... --

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Beneficial ownership of equity securities as of July 31, 1997, is shown below:

Amount and
nature of
Title of beneficial
Class Name of beneficial owner (1) ownership % of Class
- ----- ---------------------------- --------- ----------

Wheat Milling Equity Participation Units:

Directors:
Steven Burnet 30,000 units *
Steve Carney 27,000 units *
Edward Ellison 6,000 units *
Sheldon Haaland --
Jerry Hasnedl 10,000 units *
Edward Hereford --
Gerald Kuster 22,000 units *
Leonard Larsen 9,000 units *
Tyrone Moos 3,000 units *
Duane Risan 24,000 units *
Duane Stenzel --
Russell Twedt 5,000 units *
Merlin Van Walleghen --
William Zarak 6,000 units *

John D. Johnson --
Thomas F. Baker --
Michael H. Bergeland --

Garry A. Pistoria --
James Tibbetts --
---------------- -----
Directors and executive officers as a group 142,000 units 2.97%
---------------- -----

Oilseed Processing and Refining Equity Participation Units:

Directors:
Steven Burnet --
Steve Carney --
Edward Ellison 12,000 units 1.12%
Sheldon Haaland 1,500 units *
Jerry Hasnedl 1,500 units *
Edward Hereford --
Gerald Kuster 5,000 units *
Leonard Larsen --
Tyrone Moos --
Duane Risan --
Duane Stenzel 2,500 units *
Russell Twedt --
Merlin Van Walleghen 6,000 units *
William Zarak --

John D. Johnson --
Thomas F. Baker --
Michael H. Bergeland --
Garry A. Pistoria --
James Tibbetts --
---------------- -----
Directors and executive officers as a group 28,500 units 2.65%
---------------- -----

- ----------------------------------
(1) Includes units held by spouse.
* Less than 1%.

No director listed above has the right or option to acquire beneficial ownership
in additional securities other than by purchase on the open market from current
holders of such securities. Executive officers, as non-producers, are ineligible
to hold these securities.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Because directors must be active patrons of the Company or an
Affiliated Association, transactions between the Company and directors are

customary and expected. Transactions include the sale of commodities to the
Company and the purchase of products and services from the Company. During each
of the three years ended May 31, 1997, the value of those transactions between a
particular director (and members of such directors' immediate family, which
includes such director's spouse; parents; children; siblings; mothers and
fathers-in-law; sons and daughters-in-law; and brothers and sisters-in-law) and
the Company that exceeded $60,000 are shown below.

Year Ended May 31,
----------------------------------------
Name 1997 1996 1995
- ------------- -------- -------- --------
William Zarak $ 55,644 $303,125 $ 72,863
Russell Twedt 101,031 121,257 94,704
Steve Carney 250,641 746,263 466,933
Tyrone Moos 172,527
Jerry Hasnedl 143,369
Merlin Van Walleghen 148,275

PART IV.

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS FILED ON FORM 8-K

(a) (1) FINANCIAL STATEMENTS

The following financial statements and the Report of Independent
Accountants therein are filed as part of this Form 10-K.

I. HARVEST STATES COOPERATIVES

Report of Independent Accountants

Consolidated Balance Sheets as of May 31, 1997 and 1996

Consolidated Statements of Earnings for the Years Ended May 31, 1997,
1996, and 1995

Consolidated Statements of Capital for the Years Ended May 31, 1997,
1996, and 1995

Consolidated Statements of Cash Flows for the Years Ended May 31, 1997,
1996, and 1995

Notes to Consolidated Financial Statements for the Years Ended May 31,
1997, 1996, and 1995

II. OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT

Report of Independent Accountants

Balance Sheets as of May 31, 1997 and 1996

Statements of Earnings for the Years Ended May 31, 1997, 1996, and 1995

Statements of Defined Business Unit Equity for the Years Ended May 31,
1997, 1996, and 1995

Statements of Cash Flows for the Years Ended May 31, 1997, 1996, and
1995

Notes to Financial Statements for the Years Ended May 31, 1997, 1996,
and 1995

III. WHEAT MILLING DEFINED BUSINESS UNIT

Report of Independent Accountants

Balance Sheets as of May 31, 1997 and 1996

Statements of Earnings for the Years Ended May 31, 1997, 1996, and 1995

Statements of Defined Business Unit Equity for the Years Ended May 31,
1997, 1996, and 1995

Statements of Cash Flows for the Years Ended May 31, 1997, 1996, and
1995

Notes to Financial Statements for the Years Ended May 31, 1997, 1996,
and 1995

(a) (2) FINANCIAL STATEMENT SCHEDULES

None.

(a) (3) EXHIBITS

3.1 Amended and Restated Articles of Incorporation of the Company. (1)

3.2 Amended and Restated Bylaws of the Company. (1)

4.1 Resolutions of the Board of Directors creating the Equity Participation
Units (Processing and Refining). (1)

4.2 Resolutions of the Board of Directors creating the Participation Units
(Milling). (1)

10.1+ Lease Agreement between Peavey Company and Amber Milling Company, a
division of Harvest States Cooperatives, effective as of August 31,
1994. (1)

10.2 Lease between the Port of Kalama and North Pacific Grain Growers, Inc.,
dated November 22, 1960. (1)

10.3 Limited Liability Company Agreement for the Wilsey-Holsum Foods, LLC
dated July 24, 1996. (1)

10.4+ Long Term Supply Agreement between Wilsey-Holsum Foods, LLC and Harvest
States Cooperatives dated August 30, 1996. (1)

10.5 Partnership Agreement between Continental Grain Company and Harvest
States Cooperatives dated September 23, 1992. (1)

10.5(a) Amendment No. 1 to Partnership Agreement between Continental Grain and
Harvest States Cooperatives effective June 1, 1997. (2)

10.6 Harvest States Cooperatives Deferred Compensation Plan. (1)

10.7 Harvest States Cooperatives Deferred Compensation Supplemental
Retirement Plan. (1)

10.8 Harvest States Cooperatives Management Compensation Program. (1)

10.9 Revolving Credit Agreement by and among Harvest States Cooperatives,
Banque Nationale de Paris et al., the St. Paul Bank for Cooperatives
and CoBank, ACB dated November 1, 1996. (1)

10.10 Amended and Restated Master Syndicated Loan Agreement by and among
Harvest States Cooperatives, CoBank, ACB (successor to the National
Bank for Cooperatives) and the St. Paul Bank for Cooperatives dated
October 28, 1996. (1)

10.11 Fourth Supplement to the August 30, 1994 Master Syndicated Loan
Agreement by and among Harvest States Cooperatives, CoBank, ACB
(successor to the National Bank for Cooperatives) and the St. Paul Bank
for Cooperatives dated October 28, 1996. (1)

10.11(a) Promissory Note of Harvest States Cooperatives to the St. Paul Bank for
Cooperatives for $25,000,000 dated October 28, 1996. (1)

10.11(b) Promissory Note of Harvest States Cooperatives to CoBank, ACB for
$25,000,000 dated October 28, 1996. (1)

10.12 Third Supplement to the August 30, 1994 Master Syndicated Loan
Agreement by and among Harvest States Cooperatives, CoBank, ACB
(successor to the National Bank for Cooperatives) and the St. Paul Bank
for Cooperatives dated December 15, 1995. (1)

10.12(a) Promissory Note of Harvest States Cooperatives to the St. Paul Bank for
Cooperatives for $10,000,000 dated December 15, 1995. (1)

10.12(b) Promissory Note of Harvest States Cooperatives to CoBank, ACB for
$10,000,000 dated December 15, 1995. (1)

10.13 First Supplement to the August 30, 1994 Master Syndicated Loan
Agreement by and among Harvest States Cooperatives, the National Bank
for Cooperatives and the St. Paul Bank for Cooperatives dated August
30, 1994. (1)

10.13(a) Promissory Note of Harvest States Cooperatives to the St. Paul Bank for
Cooperatives for $42,500,000 dated August 30, 1994. (1)

10.13(b) Promissory Note of Harvest States Cooperatives to the National Bank for
Cooperatives for $42,500,000 dated August 30, 1994. (1)

10.14 Employment Agreement between John D. Johnson and Harvest States
Cooperatives dated January 23, 1997. (1)

10.15 Lease Agreement between the Port of Houston Authority of Harris County,
Texas and Harvest States Cooperatives, dated October 3, 1995. (1)

10.16 Lease Agreement between Lackawanna County Railroad Authority and Amber
Milling Company, a division of Harvest States Cooperatives dated June
1, 1997. (2)

21.1 Subsidiaries of the Registrant. (1)

24 Power of Attorney. (2)

27 Financial Data Schedule. (2)

- --------------------------------

+ Pursuant to Rule 406 of the Securities Act of 1933, as amended,
confidential portions of Exhibits 10.1 and 10.4 have been deleted and
filed separately with the Securities and Exchange Commission pursuant
to a request for confidential treatment.

(1) Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-17865), effective February 14, 1997.

(2) Filed herewith.

(b) REPORTS ON FORM 8-K

No reports on Form 8-K have been filed by the Registrant during the
fourth quarter of the year ended May 31, 1997.

The exhibits shown in Item 14(a)(3) above are being filed herewith.

(d) SCHEDULES

None.

SUPPLEMENTAL INFORMATION

The Company has not yet distributed annual reports. It will do so in
November of 1997 and will provide a copy to the Commission at that time. As a

cooperative, the Company does not utilize proxy statements.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized, on August
26, 1997.

HARVEST STATES COOPERATIVES

By:

/s/ John D. Johnson
- -------------------------
John D. Johnson
President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf
of the Registrant and in the capacities indicated on August 26, 1997:

/s/ John D. Johnson President and Chief Executive Officer
- -------------------------- (principal executive officer)
John D. Johnson

/s/ T. F. Baker Group Vice President - Finance
- -------------------------- (principal financial officer)
T. F. Baker

/s/ John Schmitz Vice President - Corporate Accounting
- -------------------------- (principal accounting officer)
John Schmitz

Steven Burnet* Chairman of the Board of Directors

Steve Carney* Director

Sheldon Haaland* Director

Jerry C. Hasnedl* Director

Edward Hereford* Director

Gerald Kuster* Director

Tyrone A. Moos* Director

Duane G. Risan* Director

William J. Zarak, Jr.* Director

Edward Ellison* Director

Leonard D. Larsen* Director

Duane Stenzel* Director

Russell W. Twedt* Director

Merlin Van Walleghen* Director

* By /s/ John D. Johnson
---------------------------
John D. Johnson
Attorney - in - fact

INDEPENDENT AUDITORS' REPORT

Board of Directors
Harvest States Cooperatives
Saint Paul, Minnesota

We have audited the consolidated balance sheets of Harvest States Cooperatives
and subsidiaries (the Company) as of May 31, 1997 and 1996 and the related
consolidated statements of earnings, capital, and cash flows for each of the
three years in the period ended May 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at May 31, 1997 and
1996 and the results of its operations and its cash flows for each of the three
years in the period ended May 31, 1997, in conformity with generally accepted
accounting principles.

Deloitte & Touche, LLP

August 15,1997

HARVEST STATES COOPERATIVES AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
MAY 31, 1997 AND 1996
- --------------------------------------------------------------------------------
1997 1996

ASSETS

CURRENT ASSETS:
Cash $ 38,064,191 $ 21,426,227
Receivables (Note 2) 267,517,690 367,244,539
Inventories (Note 3) 248,373,247 434,507,118
Prepaid expenses and deposits 25,562,366 41,825,850
--------------- --------------
Total current assets 579,517,494 865,003,734

OTHER ASSETS:
Investments (Note 4) 126,547,616 83,269,566
Other (Note 5) 46,489,678 48,353,983
--------------- --------------
Total other assets 173,037,294 131,623,549

PROPERTY, PLANT, AND EQUIPMENT (Notes 6 and 7) 224,150,965 232,145,401
--------------- --------------
$ 976,705,753 $1,228,772,684
=============== ==============

LIABILITIES AND CAPITAL

CURRENT LIABILITIES:
Notes payable (Note 7) $ 98,000,000 $ 324,000,000
Patron credit balances 25,190,513 29,007,419
Advances received on grain sales 125,071,207 201,825,190
Drafts outstanding 32,698,943 23,837,715
Accounts payable and accrued expenses 152,451,010 163,435,268
Patronage dividends payable 13,200,000 13,100,000
Current portion of long-term debt (Note 7) 21,094,774 13,923,204
--------------- --------------
Total current liabilities 467,706,447 769,128,796

LONG-TERM DEBT (Note 7) 113,363,692 118,705,972

OTHER LIABILITIES 10,536,301 3,685,797

COMMITMENTS AND CONTINGENCIES (Notes 8 and 13)

CAPITAL (Note 8) 385,099,313 337,252,119
--------------- --------------
$ 976,705,753 $1,228,772,684
=============== ==============

See notes to consolidated financial statements.

HARVEST STATES COOPERATIVES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED MAY 31, 1997, 1996, AND 1995
- --------------------------------------------------------------------------------

1997 1996 1995

REVENUES:
Sales:
Grain $ 6,036,502,624 $ 7,127,223,407 $ 4,191,665,535
Processed grain 730,101,124 819,863,541 708,219,307
Feed and farm supplies 258,235,512 207,252,696 156,699,068
----------------- ----------------- -----------------
7,024,839,260 8,154,339,644 5,056,583,910

Patronage dividends 15,947,049 13,278,997 6,512,481
Other revenues (Note 12) 68,627,552 68,339,523 57,556,984
----------------- ----------------- -----------------
7,109,413,861 8,235,958,164 5,120,653,375

COSTS AND EXPENSES:
Cost of goods sold 6,967,937,476 8,076,073,326 4,981,820,272
Marketing, general, and administrative 63,341,552 70,054,248 69,509,491
Interest 19,378,833 31,921,936 19,268,575
----------------- ----------------- -----------------
7,050,657,861 8,178,049,510 5,070,598,338
----------------- ----------------- -----------------

EARNINGS BEFORE INCOME TAXES 58,756,000 57,908,654 50,055,037

INCOME TAXES (Note 11) 6,200,000 6,900,000 5,100,000
----------------- ----------------- -----------------

NET EARNINGS $ 52,556,000 $ 51,008,654 $ 44,955,037
================= ================= =================

DISTRIBUTION OF NET EARNINGS:
Cash to patrons $ 13,200,000 $ 13,220,462 $ 10,992,918
Patronage certificates 30,800,000 30,877,406 25,617,898
Nonpatronage certificates 7,885,168 6,115,487 7,912,297
Capital reserve 670,832 795,299 431,924
----------------- ----------------- -----------------
Net earnings $ 52,556,000 $ 51,008,654 $ 44,955,037
================= ================= =================

See notes to consolidated financial statements.

HARVEST STATES COOPERATIVES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CAPITAL
- --------------------------------------------------------------------------------
OILSEED
WHEAT PROCESSING &
PATRONAGE NONPATRONAGE MILLING REFINING PATRONAGE CAPITAL
TOTAL CERTIFICATES CERTIFICATES EPU'S EPU'S PAYABLE RESERVE
------------ ------------ ------------ ----------- ----------- ------------ -----------

BALANCE AT MAY 31, 1994:
Stated as capital $270,761,017 $198,157,446 $ 21,900,000 $50,703,571
Stated as current liability 9,400,000 9,400,000
------------ ------------ ------------
280,161,017 198,157,446 31,300,000 50,703,571

Distribution of patronage
dividends payable for preceding
year, including cash payment of
$9,945,967 (9,945,967) 23,187,069 $ 1,832,136 (31,300,000) (3,665,172)
Redemption of capital equity
certificates (5,728,997) (5,728,997)
Other 1,046,803 150,004 896,799
Net earnings 44,955,037 36,700,000 8,255,037
Patronage dividends payable in
cash, stated as a current
liability (11,000,000) (11,000,000)
------------ ------------ ----------- ------------

BALANCE AT MAY 31, 1995:
Stated as capital 299,487,893 215,765,522 1,832,136 25,700,000 56,190,235
Stated as current liability 11,000,000 11,000,000
------------ ------------ ----------- ------------
310,487,893 215,765,522 1,832,136 36,700,000 56,190,235

Distribution of patronage
dividends payable for preceding
year, including cash payment of
$10,992,918 (10,992,918) 25,617,898 7,912,297 (36,700,000) (7,823,113)
Redemption of capital equity
certificates (6,554,160) (6,547,372) (6,788)
Equities issued 8,721,542 8,721,542
Other (2,318,892) (2,041,438) 2,350 (279,804)
Net earnings 51,008,654 43,700,000 7,308,654
Patronage dividends payable in
cash, stated as a current
liability (13,100,000) (13,100,000)
------------ ------------ ----------- ------------

BALANCE AT MAY 31, 1996:
Stated as capital 337,252,119 241,516,152 9,739,995 30,600,000 55,395,972
Stated as current liability 13,100,000 13,100,000
------------ ------------ ----------- ------------
350,352,119 241,516,152 9,739,995 43,700,000 55,395,972

Distribution of patronage
dividends payable for preceding
year, including cash payment of
$13,220,462 (13,220,462) 30,877,406 6,115,487 (43,700,000) (6,513,355)
Redemption of capital equity
certificates (8,204,091) (8,130,378) (73,713)
Equities issued 5,066,250 5,066,250
Other 912,807 89,752 (637,329) 1,460,384
Net earnings 52,556,000 44,000,000 8,556,000
Initial investment offering 10,836,690 (2,035,171) $ 9,574,000 $ 4,296,000 (998,139)
Patronage dividends payable in
cash, stated as a current
liability (13,200,000) (13,200,000)
------------ ------------ ----------- ----------- ----------- ------------ -----------

BALANCE AT MAY 31, 1997 $385,099,313 $267,384,011 $15,144,440 $ 9,574,000 $ 4,296,000 $ 30,800,000 $57,900,862
============ ============ =========== =========== =========== ============ ===========

See notes to consolidated financial statements.

HARVEST STATES COOPERATIVES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 1997, 1996, AND 1995
- --------------------------------------------------------------------------------

1997 1996 1995

CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 52,556,000 $ 51,008,654 $ 44,955,037
Adjustments to reconcile net earnings to net cash flows:
Depreciation and amortization 20,450,050 20,421,425 18,907,903
Noncash gain on investment (11,598,013) (12,517,993) (4,025,854)
Noncash portion of patronage dividends received (11,050,057) (9,607,657) (4,622,221)
Loss (gain) on sale of property, plant, and equipment 4,612,341 (853,024) (1,196,717)
Change in assets and liabilities:
Receivables 99,499,286 (33,013,948) (103,580,123)
Inventories 186,133,871 (186,968,498) (19,046,875)
Patron credit balances (3,816,906) (30,483,224) 23,282,391
Advances received on grain sales (76,753,983) 78,403,202 (1,264,842)
Accounts payable, accrued expenses, and drafts outstanding (2,123,030) 43,477,378 4,852,493
Prepaid expenses, deposits, and other 13,693,059 (25,590,317) (7,973,268)
------------- ------------- --------------
Total adjustments 219,046,618 (156,732,656) (94,667,113)
------------- ------------- --------------
Net cash provided by (used in) operating activities 271,602,618 (105,724,002) (49,712,076)

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposition of property, plant, and equipment 1,763,543 3,729,810 3,351,119
Investments redeemed 14,863,786 2,518,863 3,662,026
Acquisition of property, plant, and equipment (42,372,618) (40,501,980) (69,314,689)
Payments on notes receivable 632,526 398,851 391,412
Investments (1,274,069) (1,843,097)
Investments in joint ventures 5,736,097 (727,266) (6,650,000)
Other (437,941) (1,778,678) (1,004,755)
------------- ------------- ---------------
Net cash used in investing activities (19,814,607) (37,634,469) (71,407,984)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) borrowings under line of credit agreements (226,000,000) 124,000,000 87,000,000
Long-term debt borrowings 18,795,000 57,961,058 51,000,000
Principal payments on long-term debt (16,094,879) (10,546,075) (5,215,106)
Principal payments under capital lease obligations (1,262,305) (739,884) (680,901)
Redemption of capital equity certificates (8,204,091) (6,554,160) (5,728,997)
Proceeds from sale of equity participation units, net of expenses 10,836,690
Cash patronage dividends paid (13,220,462) (10,992,918) (9,945,967)
------------- ------------- --------------
Net cash (used in) provided by financing activities (235,150,047) 153,128,021 116,429,029
------------- ------------- --------------

INCREASE (DECREASE) IN CASH 16,637,964 9,769,550 (4,691,031)

CASH AT BEGINNING OF YEAR 21,426,227 11,656,677 16,347,708
------------- ------------- --------------

CASH AT END OF YEAR $ 38,064,191 $ 21,426,227 $ 11,656,677
============= ============= ==============

See notes to consolidated financial statements.

HARVEST STATES COOPERATIVES AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1997, 1996, AND 1995
- --------------------------------------------------------------------------------

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS - Harvest States Cooperatives is a producer-owned
agricultural cooperative organized for the mutual benefit of its
members. Membership extends from the Midwest to the Pacific Northwest.
The Cooperative's primary lines of business are grain marketing,
milling, and oilseed processing. Members' grain is marketed through a
network of inland and export elevators. Sales are both domestic and
international.

CONSOLIDATION - The consolidated financial statements include the
accounts of Harvest States Cooperatives and its majority-owned
subsidiaries (the Company). All significant intercompany balances and
transactions have been eliminated.

INVENTORIES - Grain and oilseed and processed grain and oilseed products
are stated at market, including appropriate adjustment of open purchase,
sales, and futures contracts. Feed and farm supply inventories are
priced at the lower of cost (first-in, first-out method) or market.

The Company follows the general policy of hedging its grain and oilseed
inventories and unfilled orders for grain and oilseed products to the
extent considered practicable for minimizing risk from market price
fluctuations. Futures contracts used for hedging are purchased and sold
through regulated commodity exchanges. Inventories, however, are not
completely hedged, due in part to the absence of satisfactory hedging
facilities for certain commodities and geographical areas and in part to
the Company's appraisal of its exposure from expected price
fluctuations. Noncommodity exchange purchase and sale contracts may
expose the Company to risk in the event that a counterparty to a
transaction is unable to fulfill its contractual obligation. The Company
manages its risk by entering into purchase contracts with preapproved
producers and establishing appropriate limits for individual suppliers.
Sales contracts are entered into with organizations of acceptable
creditworthiness, as internally evaluated.

INVESTMENTS - Investments in cooperatives are stated at cost including
allocated equity and retainings. Patronage dividends are recorded at the
time written notices of allocation are received. Joint ventures and
other significant equity investments are accounted for under the equity
method. Under the equity method, the Company recognizes its
proportionate share of earnings or loss of the investee. Investments in
other debt and equity securities are considered available for sale and
are stated at market value, with unrealized amounts included in other
equity.

PROPERTY, PLANT, AND EQUIPMENT - Property, plant, and equipment are
stated at cost, less accumulated depreciation. Depreciation is computed
using the straight-line method over the estimated useful lives of the
assets.

INTANGIBLE ASSETS - Leasehold rights and other intangible assets are
amortized using the straight-line method over 3 to 40 years.

GRAIN AND OILSEED SALES - Grain and oilseed sales are recorded at time
of shipment. Export sales, including those through joint ventures for
the years ended May 31, 1997, 1996, and 1995 were as follows:

1997 1996 1995

Africa $ 227,000,000 $ 195,000,000 $ 170,000,000
Asia 2,318,000,000 2,150,000,000 1,080,000,000
Europe 577,000,000 465,000,000 220,000,000
North America 360,000,000 205,000,000 85,000,000
South America 18,000,000 85,000,000 45,000,000

INCOME TAXES - Deferred income taxes are provided on temporary
differences between the tax basis of an asset or liability and its
reported amount in the financial statements. Due to the high proportion
of patronage earnings, deferred taxes resulting from temporary
differences are not significant.

ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.

RECLASSIFICATIONS - Certain reclassifications have been made to the 1996
and 1995 consolidated financial statements to conform to the 1997
presentation. These reclassifications have no effect on the operating
results of those years, as previously reported.

2. RECEIVABLES

Receivables as of May 31:

1997 1996

Trade $ 213,501,012 $ 297,112,614
Elevator accounts 56,172,256 59,163,181
Other 8,819,422 18,003,744
--------------- ----------------
278,492,690 374,279,539
Less allowance for losses (10,975,000) (7,035,000)
--------------- ----------------
$ 267,517,690 $ 367,244,539
=============== ================

3. INVENTORIES

Inventories as of May 31:

1997 1996

Grain and oilseed $ 176,605,333 $ 351,504,342
Processed grain and oilseed products 35,139,534 52,555,945
Feed and farm supplies 36,628,380 30,446,831
--------------- ----------------
$ 248,373,247 $ 434,507,118
=============== ================

4. INVESTMENTS

Investments as of May 31:

1997 1996

Cooperatives:
St. Paul Bank for Cooperatives $ 8,666,195 $ 8,180,068
National Bank for Cooperatives 3,546,889 2,855,489
Cenex 16,391,560 12,361,642
Central Ferry Terminal Association 1,222,415 1,222,283
Pro Fac Cooperative 1,789,706 1,769,656
Land O' Lakes, Inc. 7,692,077 3,460,903
Ag Processing, Inc. 16,614,505 14,044,556
Intrade Corporation 1,869,073 1,869,073
Farmland Industries 1,220,261 891,625
Lewis-Clark Terminal, Inc. 1,208,339 1,003,433
Joint Ventures:
HSPV, L.L.C. 6,408,265
Tacoma Export Marketing Company 9,163,887 9,330,337
Ventura Foods, L.L.C. 40,505,480 4,651,933
Harvest States - Farmland Specialty Feed 854,678 954,678
Ag States Agency, L.L.C. 5,018,293 4,963,174
Farmland-Harvest States, L.L.C. 1,092,660
Archer Daniels Midland Common Stock 6,213,860 5,770,031
International Malting Company 700,000 700,000
Other 2,777,738 2,832,420
--------------- ----------------
$ 126,547,616 $ 83,269,566
=============== ================

Effective August 30, 1996, the Company transferred certain assets and
liabilities of its consumer products packaging division, formerly known
as Holsum Foods, for a 40% ownership interest in a joint venture known
as Ventura Foods, L.L.C. Simultaneously with the Ventura Foods joint
venture agreement, Ventura, a joint venture which was owned 50% by the
Company was merged into Ventura Foods, L.L.C. Ventura Foods, L.L.C. is
in the business of manufacturing and/or packaging and selling food
products, including salad dressings, mayonnaise, margarine, salad oils,
jams, jellies, olives, syrups, soup bases, and sauces to a national
customer base. Profits and losses are shared in accordance with
ownership percentages.

5. OTHER ASSETS

Other assets as of May 31:

1997 1996

Leasehold rights and other intangibles, less accumulated
amortization of $6,824,986 and $7,145,101 $ 15,232,601 $ 24,908,896
Notes receivable 1,520,511 1,780,474
Prepaid expenses and other assets 29,736,566 21,664,613
------------------ -----------------
$ 46,489,678 $ 48,353,983
================== =================

6. PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment as of May 31:

Estimated
Useful Life
in Years 1997 1996

Grain terminals and country elevators 3 to 50 $ 229,171,093 $ 210,151,675
Grain processing plants 3 to 40 163,918,161 199,403,336
Feed plants 3 to 40 24,706,884 23,137,566
Corporate office facilities 3 to 40 12,654,230 11,512,620
----------------- -----------------
430,450,368 444,205,197
Less accumulated depreciation (206,299,403) (212,059,796)
----------------- -----------------
$ 224,150,965 $ 232,145,401
================= =================

During the years ended May 31, 1997, 1996, and 1995, the Company
capitalized interest of $588,731, $739,101, and $587,637, respectively.

7. BORROWINGS

NOTES PAYABLE:

The Company has a seasonal loan agreement of $123,000,000 ($200,000,000
at May 31, 1996) committed with St. Paul Bank for Cooperatives,
$9,000,000 and $128,250,000 of which were outstanding on May 31, 1997
and 1996, respectively. The Company has a seasonal loan agreement of
$277,000,000 committed with National Bank for Cooperatives, $44,000,000
and $95,750,000 of which were outstanding on May 31, 1997 and 1996,
respectively. The Company also has seasonal loan agreements of
$150,000,000 committed with commercial banks, $45,000,000 and
$100,000,000 of which were outstanding on May 31, 1997 and 1996,
respectively. The average weighted interest rates as of May 31, 1997 and
1996 were 5.8% and 6.05%, respectively. Major financial covenants of the
seasonal loan agreements provide that (1) the Company will maintain a
working capital amount of not less than $100,000,000; (2) the Company
shall have consolidated members and patrons' equity of not less than
$275,000,000; and (3) the Company shall not have consolidated funded
debt to consolidated members and patrons' equity in excess of .80 to
1.00. The Company is also required to maintain investments in the St.
Paul Bank for Cooperatives and the

National Bank for Cooperatives based upon borrowing levels. Patronage
allocations to the Company are used to maintain such required level of
investment. No direct cash investment is required. The total unused
seasonal loan commitment at May 31, 1997 was $452,000,000.

LONG-TERM DEBT AT MAY 31:

1997 1996

St. Paul Bank for Cooperatives, with fixed and variable
interest rates from 6.43% to 8.75%, due in installments
through 2007 $ 68,550,333 $ 68,192,000
National Bank for Cooperatives with fixed and variable
interest rates from 6.43% to 7.51%, due in installments
through 2007 56,458,333 52,500,000
Industrial Development Revenue Bonds, payable through
July 2005, interest rate of 7.4% 2,100,000 3,300,000
Capitalized lease obligations with fixed and variable rates,
8.0% to 8.90% at May 31, 1997 5,551,793 6,522,624
Mortgages payable and other 1,798,007 2,114,552
--------------- ----------------
134,458,466 132,629,176
Less current portion (21,094,774) (13,923,204)
--------------- ----------------
$ 113,363,692 $ 118,705,972
=============== ================

Annual maturities of outstanding long-term indebtedness due in years
ending after May 31, 1997 are as follows:

1998 $ 21,094,774
1999 17,036,058
2000 18,080,431
2001 13,285,423
2002 13,487,139
2003 and thereafter 51,474,641

8. PATRONS' EQUITY

In accordance with the bylaws and by action of the Board of Directors,
annual net earnings from patronage sources are distributed to consenting
patrons following the close of each year and are based on amounts
reportable for federal income tax purposes as adjusted in accordance
with the bylaws. The cash portion of this distribution is determined
annually by the Board of Directors, with the balance issued in the form
of Patronage Certificates.

Annual net earnings from sources other than patronage may be added to
the Capital Reserve or, upon action by the Board of Directors, allocated
to members in the form of Nonpatronage Certificates.

The Board of Directors has authorized the redemption of Patronage
Certificates held by patrons who are 72 years of age and those held by
estates of deceased patrons. The Board of Directors has also authorized
the redemption of Nonpatronage Certificates held by estates of deceased
patrons.

On May 31, 1997, the Company completed an offering for the sale of
Equity Participation Units (EPUs) in its Wheat Milling Defined Business
Unit and its Oilseed Processing and Refining Defined Business Unit to
qualified subscribers. Subscribers were allowed to purchase a portion of
their EPUs by exchanging existing patronage certificates. Qualified
subscribers are identified as Defined Members or representatives of
Defined Members which are persons actually engaged in the production of
agricultural products or associations of producers of agricultural
products. The purchasers of EPUs have the right and obligation to
deliver annually the number of bushels of wheat or soybeans equal to the
number of Units held. Beginning in the fiscal year ended May 31, 1998,
unit holders will participate in the net patronage sourced income from
operations of the applicable defined business unit as patronage refunds.
It is the Board of Directors goal to distribute patronage refunds
attributable to Equity Participation Units in the form of 75% cash and
25% patrons' equities. Retirement of patrons' equities attributable to
EPUs is at the discretion of the Board of Directors, but it is the
Board's goal to retire such equity on a revolving basis seven years
after declaration.

9. RETIREMENT PLANS

The Company has noncontributory defined benefit retirement plans
covering substantially all salaried and full-time hourly employees. The
retirement plan benefits for salaried employees are based on years of
service and the participants' total compensation. Benefits for hourly
employees are based on various monthly amounts for each year of credited
service. The plans are funded by annual contributions to tax-exempt
trusts in accordance with federal law and regulations. Plan assets
consist principally of corporate obligations, U.S. Government bonds,
money market funds, and immediate participation guarantee contracts.

During the year ended May 31, 1995, several participants in a
nonqualified supplemental defined benefit plan retired, which resulted
in an actuarial loss of a magnitude that required a settlement
adjustment to be recorded.

Net pension expense for the years ended May 31 consists of the
following:

1997 1996 1995

Service cost - benefits earned during
the period $ 2,883,242 $ 2,496,711 $ 2,564,115
Interest cost on projected benefit obligation 5,907,204 5,587,377 6,376,612
Actual return on plan assets (2,441,078) (6,860,278) (7,329,046)
Net amortization and deferral (4,081,960) 555,130 1,165,499
Benefit plan settlement adjustment 3,020,077
-------------- ------------- --------------
$ 2,267,408 $ 1,778,940 $ 5,797,257
============== ============= ==============

The funded status of the plans and the amount recognized on the
consolidated balance sheet as of May 31 are as follows:

1997 1996

Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $75,515,800 and $74,406,137, respectively $ 77,644,611 $ 77,127,866
============== ===============
Projected benefit obligation for service rendered to date $ 78,660,275 $ 81,036,131
Plan assets at fair value 76,348,832 75,743,570
-------------- ---------------
Plan assets less than projected benefit obligation (2,311,443) (5,292,561)
Unrecognized net loss 27,737,539 25,449,810
Unrecognized transition gain at June 1, 1985 being
recognized over 13 years (1,259,030) (2,517,627)
Unrecognized prior-service cost (1,330,578) 1,520,901
Additional minimum liability (837,742) (1,098,275)
-------------- ---------------
Prepaid pension cost $ 21,998,746 $ 18,062,248
============== ===============

The determination of the actuarial present value of the projected
benefit obligation was based on a weighted average discount rate of
7.75% in 1997 and 1996, and 8.25% in 1995 and a rate of increase in
future compensation of 5% in 1997, 1996, and 1995. The expected
long-term rate of return on plan assets was 8.5% in 1997, 8% in 1996,
and 8.5% in 1995.

10. POSTRETIREMENT MEDICAL AND OTHER BENEFITS

The Company provides certain health care benefits for retired employees.
Employees become eligible for these benefits if they meet minimum age
and service requirements and are eligible for retirement benefits.

The accrued postretirement medical and other benefits costs which are
not funded were as follows at May 31:

1997 1996

Accumulated postretirement benefit obligation (APBO):
Retirees $ 4,371,635 $ 2,993,307
Fully eligible active plan participants 775,433 1,019,071
Other active plan participants 3,032,288 3,624,620
------------- ---------------
Total APBO 8,179,356 7,636,998

Unrecognized transition obligation (8,501,474) (9,430,105)
Unrecognized net gains 3,526,263 4,059,863
------------- ---------------
Accrued postretirement medical and other benefits cost $ 3,204,145 $ 2,266,756
============= ===============

The components of the net periodic cost are as follows:

1997 1996 1995

Service cost - benefits earned during the year $ 320,925 $ 337,182 $ 312,814
Interest cost on projected benefit obligation 594,742 548,997 739,055
Amortization of unrecognized gains (147,241) (228,025) (41,435)
Amortization of transition obligation 531,392 554,710 554,710
Curtailment cost 205,947
-------------- ------------- --------------
Net periodic postretirement cost $ 1,505,765 $ 1,212,864 $ 1,565,144
============== ============= ==============

The calculations assumed a discount rate of 7.75% in 1997 and 1996 and a
health-care-cost trend rate of 9.5% in 1997, declining to 6.0% in 2004.
If the health-care-cost trend rate increased by 1%, the APBO would
increase by 6.4% and the service cost and interest cost components would
increase by 8.5%.

11. PROVISION FOR INCOME TAXES

The provision for income taxes for each of the three years ended May 31
was as follows:

1997 1996 1995

Current provision $ 6,200,000 $ 7,100,000 $ 5,400,000
Deferred - principally federal (200,000) (300,000)
-------------- ------------- --------------
Total provision $ 6,200,000 $ 6,900,000 $ 5,100,000
============== ============= ==============

Deferred income taxes, which are not significant, relate principally to
allowances and accruals.

A reconciliation of the statutory federal tax rate to the effective rate
for each of the three years ended May 31 follows:

1997 1996 1995

Statutory federal income tax rate 35.0% 35.0% 35.0%
State and local income taxes, net of federal income tax benefit 4.9 4.3 2.6
Patronage earnings (29.8) (29.6) (27.6)
Other .5 2.2 .2
------ ------ ------
Effective rate 10.6% 11.9% 10.2%
====== ====== ======

12. OTHER REVENUES

Years Ended May 31
----------------------------------------------------
1997 1996 1995

Storage and handling $ 7,424,823 $ 8,722,537 $ 9,168,022
Service revenues 27,419,350 20,572,679 15,942,394
Commission 5,879,621 6,837,272 6,722,261
Joint venture income 11,598,013 12,517,993 4,025,854
Gain (loss) on sale of property, plant,
and equipment (4,612,341) 853,024 1,196,717
Interest income 9,448,433 11,581,221 11,471,627
Other 11,469,653 7,254,797 9,030,109
-------------- -------------- ---------------
$ 68,627,552 $ 68,339,523 $ 57,556,984
============== ============== ===============

13. COMMITMENTS AND CONTINGENCIES

At May 31, 1997 and 1996, the Company stored grain and processed grain
products for others totaling $61,200,000 and $37,900,000, respectively.
Such stored commodities and products are not the property of the Company
and therefore are not included in the Company inventory.

The Company is a guarantor for lines of credit for related companies
totaling $26,000,000, of which $10,200,000 was outstanding as of May 31,
1997. All outstanding loans are current with respective creditors as of
May 31, 1997.

The Company leases approximately 3,400 rail cars with remaining lease
terms of one to ten years. In addition, the Company leases vehicles and
various manufacturing equipment.

Minimum rental payments due under these operating leases at May 31,
1997, are as follows:

Rail Cars Vehicles Other Total

1998 $ 18,392,444 $ 5,101,208 $ 1,824,548 $ 25,318,200
1999 16,700,959 4,200,139 1,375,291 22,276,389
2000 12,732,283 2,955,712 1,236,772 16,924,767
2001 7,921,650 1,607,004 930,081 10,458,735
2002 5,302,372 725,849 854,202 6,882,423
2003 and thereafter 7,459,280 566,113 3,346,668 11,372,061
------------- -------------- ------------- ---------------
$ 68,508,988 $ 15,156,025 $ 9,567,562 $ 93,232,575
============= ============== ============= ===============

Total rent expense, net of rail car mileage credits received from the
railroad and subleases, was approximately $13,624,000, $12,454,000, and
$11,378,000 for the years ended May 31, 1997, 1996, and 1995,
respectively. Mileage credits and sublease income were $13,641,000,
$7,257,000, and $5,126,000 for the years ended May 31, 1997, 1996, and
1995, respectively.

The Company is a party to various lawsuits and administrative
proceedings incidental to its business. It is impossible, at this time,
to estimate what the ultimate legal and financial liability of

the Company will be; nevertheless, management believes, based on the
information available to date and the resolution of prior proceedings,
that the ultimate liability of all litigation and proceedings will not
have a material impact on the financial statements of the Company taken
as a whole.

14. SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION

Additional information concerning supplemental disclosures of cash flow
activities for the years ended May 31 is as follows:

1997 1996 1995

Net cash paid during year for:
Interest $ 20,737,222 $ 31,836,722 $ 17,741,969
Income taxes 4,457,322 3,934,688 7,054,563

Significant noncash transactions:
Noncash patronage refunds issued
from prior year's earnings 30,877,406 25,617,898 23,187,069
Noncash nonpatronage certificates
issued from prior year's earnings 6,115,487 7,912,297 1,832,136
Capital equity certificates issued
in exchange for elevator properties 4,985,585 8,721,542
Capital equity certificates exchanged
for equity participation units 2,035,171

15. FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107, DISCLOSURE ABOUT
FAIR VALUE OF FINANCIAL INSTRUMENTS, requires disclosure of the fair
value of all financial instruments to which the Company is a party. All
financial instruments are carried at amounts that approximate estimated
fair value, except for investments in cooperatives, for which it is not
practicable to provide fair value information.

INDEPENDENT AUDITORS' REPORT

Board of Directors
Harvest States Cooperatives
Saint Paul, Minnesota

We have audited the balance sheets of the Oilseed Processing and Refining
Defined Business Unit (the Defined Business Unit), formerly known as Honeymead
Products Company, a defined business unit of Harvest States Cooperatives as of
May 31, 1997 and 1996 and the related statements of earnings, defined business
unit equity, and cash flows for each of the three years in the period ended May
31, 1997. These financial statements are the responsibility of the Defined
Business Unit`s management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Oilseed Processing and Refining Defined
Business Unit at May 31, 1997 and 1996 and the results of its operations and its
cash flows for each of the three years in the period ended May 31, 1997 in
conformity with generally accepted accounting principles.

Deloitte & Touche, LLP

August 15, 1997

OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)

BALANCE SHEETS
MAY 31, 1997 AND 1996
- --------------------------------------------------------------------------------

1997 1996

ASSETS

CURRENT ASSETS:
Receivables (Note 2) $ 34,169,676 $ 22,795,612
Inventories (Note 3) 22,850,699 26,235,220
Prepaid expenses and deposits 2,310,163 310,692
-------------- ---------------
Total current assets 59,330,538 49,341,524

PROPERTY, PLANT, AND EQUIPMENT (Note 4) 33,085,560 24,771,413
-------------- ---------------
$ 92,416,098 $ 74,112,937
============== ===============

LIABILITIES AND DEFINED BUSINESS UNIT EQUITY

CURRENT LIABILITIES:
Due to Harvest States Cooperatives (Note 5) $ 25,584,178 $ 9,482,351
Accounts payable and accrued expenses 13,440,922 11,239,588
-------------- ---------------
Total current liabilities 39,025,100 20,721,939

COMMITMENTS AND CONTINGENCIES (Note 10)

DEFINED BUSINESS UNIT EQUITY (Note 6) 53,390,998 53,390,998
-------------- ---------------
$ 92,416,098 $ 74,112,937
============== ===============

See notes to financial statements.

OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)

STATEMENTS OF EARNINGS
YEARS ENDED MAY 31, 1997, 1996, AND 1995
- --------------------------------------------------------------------------------

1997 1996 1995

REVENUES:
Processed oilseed sales $ 441,737,923 $ 399,271,001 $ 398,095,108
Other (expense) revenue (1,659,881) 1,435,708 1,162,518
--------------- -------------- ---------------
440,078,042 400,706,709 399,257,626

COSTS AND EXPENSES:
Cost of goods sold 405,791,384 371,424,566 366,407,451
Marketing, general, and administrative 4,341,904 4,544,763 5,137,663
Interest 321,700 151,500
--------------- -------------- ---------------
410,454,988 376,120,829 371,545,114
--------------- -------------- ---------------

EARNINGS BEFORE INCOME TAXES 29,623,054 24,585,880 27,712,512

INCOME TAXES (Note 9) 2,100,000 1,600,000 1,500,000
--------------- -------------- ---------------

NET EARNINGS $ 27,523,054 $ 22,985,880 $ 26,212,512
=============== ============== ===============

See notes to financial statements.

OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)

STATEMENTS OF DEFINED BUSINESS UNIT EQUITY
- --------------------------------------------------------------------------------

BALANCE AT MAY 31, 1994 $ 53,390,998

Net earnings 26,212,512
Divisional equity distributed (26,212,512)
---------------
BALANCE AT MAY 31, 1995 53,390,998

Net earnings 22,985,880
Divisional equity distributed (22,985,880)
---------------
BALANCE AT MAY 31, 1996 53,390,998

Net earnings 27,523,054
Defined business unit equity distributed (27,523,054)
---------------
BALANCE AT MAY 31, 1997 $ 53,390,998
===============

See notes to financial statements.

OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)

STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 1997, 1996, AND 1995
- --------------------------------------------------------------------------------

1997 1996 1995

CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 27,523,054 $ 22,985,880 $ 26,212,512
Adjustments to reconcile net earnings to net cash flows:
Depreciation and amortization 1,777,475 1,598,965 1,724,844
(Gain) loss on sale of property, plant, and equipment 2,045,150 31,765 (431)
Change in assets and liabilities:
Receivables (11,374,064) (2,407,691) (568,635)
Inventories 3,384,521 (8,980,005) 16,861,993
Prepaid expenses and deposits (1,999,471) 213,459 152,531
Accounts payable and accrued
expenses 2,201,334 957,592 482,095
-------------- ------------- --------------
Total adjustments (3,965,055) (8,585,915) 18,652,397
-------------- ------------- --------------
Net cash provided by operating activities 23,557,999 14,399,965 44,864,909

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposition of property, plant, and
equipment 1,000
Acquisition of property, plant, and equipment (12,136,772) (5,991,735) (2,557,886)
-------------- ------------- --------------
Net cash used in investing activities (12,136,772) (5,991,735) (2,556,886)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from (repayments to) Harvest States
Cooperatives 16,101,827 14,577,650 (16,095,511)
Defined business unit equity distributed (27,523,054) (22,985,880) (26,212,512)
-------------- ------------- --------------
Net cash used in financing activities (11,421,227) (8,408,230) (42,308,023)
-------------- ------------- --------------

INCREASE (DECREASE) IN CASH

CASH AT BEGINNING OF PERIOD -------------- ------------- --------------

CASH AT END OF PERIOD $ - $ - $ -
============== ============= =============

See notes to financial statements.

OILSEED PROCESSING AND REFINING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)

NOTES TO FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1997, 1996, AND 1995
- --------------------------------------------------------------------------------

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND NATURE OF BUSINESS - Harvest States Cooperatives
Oilseed Processing and Refining Defined Business Unit (the Defined
Business Unit), formerly known as Honeymead Products Company, is a
defined business unit of Harvest States Cooperatives (the Company) and
is not organized as a separate legal entity. The purpose of the Defined
Business Unit is to carry on the operations of the Oilseed Processing
and Refining Division. The assets and liabilities of the Defined
Business Unit continue to be 100% owned by the Company. The Defined
Business Unit operates a single soybean crushing and oil refining plant
in Mankato, Minnesota and serves customers throughout the United States.

CASH MANAGEMENT - The Defined Business Unit draws all of its cash
requirements from and deposits all cash generated with the Company's
centralized cash management system.

INVENTORIES - Oilseed and processed oilseed products are stated at
market, including adjustment for open purchase, sales, and futures
contracts and deferral of profit on processed oilseed products.

The Defined Business Unit follows the general policy of hedging its
oilseed inventories and unfilled orders for oilseed products to the
extent considered practicable for minimizing risk from market price
fluctuations. Futures contracts used for hedging are purchased and sold
through regulated commodity exchanges. Inventories, purchase
commitments, and sales commitments however, are not completely hedged,
due in part to the absence of satisfactory hedging facilities for
certain commodities and geographical areas and in part to the Defined
Business Unit's appraisal of its exposure from expected price
fluctuations. Noncommodity exchange purchase and sale contracts may
expose the Defined Business Unit to risk in the event that a
counterparty to a transaction is unable to fulfill its contractual
obligation. The Defined Business Unit manages its risk by entering into
purchase contracts with preapproved producers and companies and by
establishing appropriate limits for individual suppliers. Sales
contracts are entered into with organizations of acceptable
creditworthiness, as internally evaluated.

DEFINED BUSINESS UNIT EQUITY - The Defined Business Unit's earnings are
distributed to the Company at the end of each quarter. All
patronage-related liability and capital accounts are maintained at the
Company's consolidated level.

INCOME TAXES - Earnings generated on oilseed purchased by the Defined
Business Unit from nonmembers are characterized as nonpatronage and
taxable. Earnings generated on oilseed purchased from the Company are
considered to be patronage to the extent of the Company's patronage
purchase percentage of that particular commodity; the other portion of
those earnings is considered taxable. Due to the high proportion of
patronage earnings, deferred taxes resulting from temporary differences
are not significant.

SALES - Sales of processed oilseeds are recognized upon shipment to
customers, net of freight charges.

REVENUE FROM SIGNIFICANT CUSTOMERS - Sales to two customers accounted
for 25% and 11% of total sales for the year ended May 31, 1997. Sales
to one customer accounted for 31% and 20% of total sales for the years
ended May 31, 1996 and 1995, respectively.

2. RECEIVABLES

May 31,
---------------------------------
1997 1996

Trade $ 34,564,676 $ 23,190,612
Less allowance for losses (395,000) (395,000)
-------------- ---------------
$ 34,169,676 $ 22,795,612
============== ===============

3. INVENTORIES

May 31,
---------------------------------
1997 1996

Oilseed $ 11,740,227 $ 17,141,111
Processed oilseed products 11,110,472 9,094,109
-------------- ---------------
$ 22,850,699 $ 26,235,220
============== ===============

4. PROPERTY, PLANT, AND EQUIPMENT

Estimated
Useful Life May 31,
---------------------------------
in Years 1997 1996

Land $ 630,043 $ 630,043
Elevators, crushing plant,
and refinery 15 to 20 21,262,318 21,268,532
Machinery and equipment 5 to 18 46,235,522 41,077,104
Furniture and fixtures 3 to 12 379,363 379,363
Other 5 to 12 99,112 99,112
-------------- ---------------
68,606,358 63,454,154
Less accumulated depreciation (42,576,795) (42,310,640)
-------------- ---------------
26,029,563 21,143,514
Construction-in-progress 7,055,997 3,627,899
-------------- ---------------
$ 33,085,560 $ 24,771,413
============== ===============

5. DUE TO HARVEST STATES COOPERATIVES

The Defined Business Unit satisfies its working capital needs through
borrowings, both long- and short-term, from the Company to the extent
the Company's borrowing capacity permits.

For the years ended May 31, 1996 and 1995, respectively, interest on
short-term borrowings from the Company was charged to the divisions
based upon a ratable allocation of the Company's consolidated interest
expense related to short-term borrowings based upon working capital
employed by each division. This results in an effective borrowing rate
that may be different than what the division could obtain on an
independent basis.

During the year ended May 31, 1997, the Company began charging the
Defined Business Unit interest on its daily average of short-term
borrowings at a rate equivalent to the weighted average interest rate on
short-term borrowings of the Company. On May 31, 1997, the weighted
average borrowing rate of the Company's short-term borrowings was 5.8%.
Amounts due from the Company will receive interest in the same manner at
the same rate.

Long-term debt has been allocated by the Company on a specified use
basis to its defined business units, generally for capital expenditures.

6. DEFINED BUSINESS UNIT EQUITY

On May 31, 1997, the Company completed an offering for the sale of
Equity Participation Units (EPUs) in its Oilseed Processing and Refining
Defined Business Unit to qualified subscribers. Qualified subscribers
are identified as Defined Members or representatives of Defined Members
which have been defined as persons actually engaged in the production of
agricultural products or associations of producers of agricultural
products. The purchasers of EPUs have the right and obligation to
deliver annually the number of bushels of soybeans equal to the number
of Units held. Beginning in the fiscal year ended May 31, 1998, unit
holders will participate in the net patronage sourced income from
operations of the Oilseed Processing and Refining Defined Business Unit
as patronage refunds. EPUs represent an ownership interest in the

Company, not the Defined Business Unit. The assets and liabilities of
the Defined Business Unit continue to be 100% owned by the Company.

7. RETIREMENT PLANS

The Defined Business Unit, through the Company, has noncontributory
defined benefit retirement plans covering substantially all salaried and
full-time hourly employees. The retirement plan benefits for salaried
employees are based on years of service and the participants' total
compensation. Benefits for hourly employees are based on various monthly
amounts for each year of credited service. The plans are funded by
annual contributions to tax-exempt trusts in accordance with federal law
and regulations. Plan assets consist principally of corporate
obligations, U.S. Government bonds, money market funds, and immediate
participation guarantee contracts. Pension costs billed to the Defined
Business Unit for the years ended May 31, 1997, 1996, and 1995 were
approximately $147,000, $169,000, and $264,000, respectively. The
Defined Business Unit's portion of the actuarial present value or
accumulated benefit obligations and net pension assets available for
benefits has not been determined. Selected information at May 31 for the
Company's plan is as follows:

1997 1996

Accumulated benefit obligation, including vested benefits
of $75,515,800 and $74,406,137, respectively $ 77,644,611 $ 77,127,866
Projected benefit obligation for service rendered to date 78,660,275 81,036,131
Plan assets at fair value 76,348,832 75,743,570

8. POSTRETIREMENT MEDICAL AND OTHER BENEFITS

The Defined Business Unit, through the Company, provides certain health
care benefits for retired employees. Employees become eligible for these
benefits if they meet minimum age and service requirements and are
eligible for retirement benefits.

The accrued postretirement medical and other benefits costs of the
Company that are not funded were as follows at May 31:

1997 1996

The net periodic costs billed to the Defined Business Unit for the years
ended May 31, 1997, 1996, and 1995 were approximately $229,000,
$197,000, and $238,000, respectively.

The calculations assumed a discount rate of 7.75% in 1997 and 1996 and a
health care cost trend rate of 9.5% in 1997, declining to 6% in 2004. If
the health care cost trend rate increased by 1%, the APBO would increase
by 6.4% and the service cost and interest cost components would increase
by 8.5%.

9. PROVISION FOR INCOME TAXES

Results of operations of the Oilseed Processing and Refining Defined
Business Unit are included in the consolidated federal income tax return
of the Company. The Company has a policy that provides for the payment
of taxes on an individual company basis for each of its defined business
units and divisions.

No significant deferred income tax provision was recorded by the Defined
Business Unit.

A reconciliation of the statutory federal tax rate to the effective rate
for the years ended May 31, follows:

1997 1996 1995

Statutory federal income tax rate 35.0% 35.0% 35.0%
State and local income taxes, net of federal income tax benefit 4.9 4.3 2.6
Patronage earnings (32.6) (35.0) (32.4)
Other (.2) 2.2 .2
------ ------ ------
Effective rate 7.1% 6.5% 5.4%
====== ====== ======

10. COMMITMENTS AND CONTINGENCIES

Leases for approximately 339 rail cars with remaining lease terms of one
to ten years are used by the Defined Business Unit.

Minimum rental payments due under these operating leases at May 31, 1997
are as follows:

Year Ending May 31:
1998 $ 1,673,040
1999 1,468,110
2000 1,192,940
2001 920,710
2002 862,200
2003 and thereafter 1,043,400
--------------
$ 7,160,400
==============

Total rent expense, net of rail car mileage credits received from the
railroad and subleases, was approximately $1,944,747, $1,832,413, and
$1,771,790, for the years ended May 31, 1997, 1996, and 1995,
respectively.

There are various lawsuits and administrative proceedings incidental to
the business of the Defined Business Unit. It is impossible, at this
time, to estimate what the ultimate legal and financial liability of the
Defined Business Unit will be; nevertheless, management believes, based
on the information available to date and the resolution of prior
proceedings, that the ultimate liability of all litigation and
proceedings will not have a material impact on the financial statements
of the Defined Business Unit taken as a whole.

At May 31, 1997, the operations of the Defined Business Unit had
outstanding oilseed purchase contracts of 1,481,386 bushels at prices
ranging from $6.35 per bushel to $8.80 per bushel, and outstanding oil
purchase contracts of 253,279,083 pounds at prices ranging from $0.2280
per pound to $0.2582 per pound. In addition, the operations of the
Defined Business Unit had outstanding sales contracts totaling
approximately $39,443,850.

11. RELATED-PARTY TRANSACTIONS

Net sales for the years ended May 31, 1997, 1996, and 1995 included
$110,678,770, $124,299,369, and $79,133,437, respectively, to related
parties.

The operations of the Defined Business Unit purchases a portion all of
its soybeans from the Company, a related party. Included in cost of
goods sold for the years ended May 31, 1997, 1996, and 1995 were
$5,726,038, $3,772,327, and $5,502,705, respectively, of these
purchases.

Additionally, the Company performs various direct management services
and incurs certain costs for its defined business unit and divisions.
Such costs, including data processing, office services, and insurance,
are charged directly to the defined business units and divisions.
Indirect expenses, such as publications, board expense, executive
management, legal, finance, and human resources, are allocated to the
defined business units and divisions based on approximate usage. Costs
allocated to the Oilseed Processing and Refining Defined Business Unit
for the years ended May 31, 1997, 1996, and 1995 were $825,000,
$750,000, and $1,300,000, respectively.

12. SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION

Additional information concerning supplemental disclosures of cash flow
activities for the years ended May 31 is as follows:

1997 1996 1995

Net cash paid during year for:
Interest $ 321,700 $ 151,500
Income taxes 2,300,000 1,500,000 $ 1,650,000

INDEPENDENT AUDITORS' REPORT

Board of Directors
Harvest States Cooperatives
Saint Paul, Minnesota

We have audited the balance sheets of the Wheat Milling Defined Business Unit
(the Defined Business Unit), formerly known as Amber Milling Company, a defined
business unit of Harvest States Cooperatives, as of May 31, 1997 and 1996 and
the related statements of earnings, defined business unit equity, and cash flows
for each of the three years in the period ended May 31, 1997. These financial
statements are the responsibility of the Defined Business Unit's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Wheat Milling Defined Business Unit at
May 31, 1997 and 1996 and the results of its operations and its cash flows for
each of the three years in the period ended May 31, 1997, in conformity with
generally accepted accounting principles.

Deloitte & Touche, LLP

August 15, 1997

WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)

BALANCE SHEETS
MAY 31, 1997 AND 1996
- --------------------------------------------------------------------------------

1997 1996

ASSETS

CURRENT ASSETS:

Receivables (Note 2) $ 26,860,772 $ 43,749,134
Inventories (Note 3) 12,271,615 9,308,275
Prepaid expenses and deposits 840,730 149,873
--------------- ----------------
Total current assets 39,973,117 53,207,282

OTHER ASSETS (Note 4) 11,814,555 12,881,236

PROPERTY, PLANT, AND EQUIPMENT (Note 5) 69,130,520 59,233,046
--------------- ----------------
$ 120,918,192 $ 125,321,564
=============== ================

LIABILITIES AND DEFINED BUSINESS UNIT EQUITY

CURRENT LIABILITIES:
Due to Harvest States Cooperatives (Note 6) $ 22,413,445 $ 31,044,150
Accounts payable and accrued expenses 9,493,405 12,480,342
Current portion of long-term debt (Note 6) 10,005,000 6,344,584
--------------- ----------------
Total current liabilities 41,911,850 49,869,076

LONG-TERM DEBT (Note 6) 51,209,270 47,655,416

COMMITMENTS AND CONTINGENCIES (Note 11)

DEFINED BUSINESS UNIT EQUITY (Note 7) 27,797,072 27,797,072
--------------- ----------------
$ 120,918,192 $ 125,321,564
=============== ================

See notes to financial statements.

WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)

STATEMENTS OF EARNINGS
YEARS ENDED MAY 31, 1997, 1996, AND 1995
- --------------------------------------------------------------------------------

1997 1996 1995

REVENUES -
Processed grain sales $ 199,078,687 $ 173,315,613 $ 119,725,183

COSTS AND EXPENSES:
Cost of goods sold 181,565,899 161,293,430 112,690,679
Marketing, general, and administrative 6,749,237 4,471,563 3,834,289
Interest 5,229,669 4,457,797 2,278,544
Other (Note 1) 2,000,000
------------- ------------- --------------
195,544,805 170,222,790 118,803,512
------------- ------------- --------------

EARNINGS BEFORE INCOME TAXES 3,533,882 3,092,823 921,671

INCOME TAXES (Note 10) 300,000 200,000 125,000
------------- ------------- --------------

NET EARNINGS $ 3,233,882 $ 2,892,823 $ 796,671
============= ============= ==============

See notes to financial statements.

WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)

STATEMENTS OF DEFINED BUSINESS UNIT EQUITY
- --------------------------------------------------------------------------------

BALANCE AT MAY 31, 1994 $ 27,797,072

Net earnings 796,671
Divisional equity distributed (796,671)
---------------

BALANCE AT MAY 31, 1995 27,797,072

Net earnings 2,892,823
Divisional equity distributed (2,892,823)
---------------

BALANCE AT MAY 31, 1996 27,797,072

Net earnings 3,233,882
Defined business unit equity distributed (3,233,882)
---------------

BALANCE AT MAY 31, 1997 $ 27,797,072
===============

See notes to financial statements.

WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)

STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 1997, 1996, AND 1995
- --------------------------------------------------------------------------------

1997 1996 1995

CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 3,233,882 $ 2,892,823 $ 796,671
Adjustments to reconcile net earnings to net cash flows:
Depreciation and amortization 4,137,440 3,309,307 2,512,430
Loss on Impairment (Note 1) 2,000,000
Change in assets and liabilities:
Receivables 16,888,362 (25,116,058) (3,781,655)
Inventories (2,963,340) (2,302,088) 4,387,100
Prepaid expenses, deposits, and other (690,857) (51,007) 55,168
Accounts payable and accrued expenses (2,986,937) 5,063,539 3,854,638
------------ ------------- --------------
Total adjustments 16,384,668 (19,096,307) 7,027,681
------------ ------------- --------------
Net cash provided by (used in) operating activities 19,618,550 (16,203,484) 7,824,352

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of additional intangibles (475,654) (5,624,405)
Acquisition of property, plant, and equipment (14,968,233) (18,080,009) (25,123,131)
------------ ------------- --------------
Net cash used in investing activities (14,968,233) (18,555,663) (30,747,536)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments to) borrowings from Harvest States Cooperatives (8,630,705) 17,401,970 8,969,855
Long-term debt borrowings 15,000,000 20,250,000 14,750,000
Principal payments on long-term debt (7,785,730)
Defined business unit equity distributed (3,233,882) (2,892,823) (796,671)
------------ ------------- --------------
Net cash (used in) provided by financing activities (4,650,317) 34,759,147 22,923,184
------------ ------------- --------------

INCREASE (DECREASE) IN CASH

CASH AT BEGINNING OF PERIOD ------------ ------------- --------------

CASH AT END OF PERIOD $ - $ - $ -
============ ============= ==============

See notes to financial statements.

WHEAT MILLING DEFINED BUSINESS UNIT
(A DEFINED BUSINESS UNIT OF HARVEST STATES COOPERATIVES)

NOTES TO FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1997, 1996, AND 1995
- --------------------------------------------------------------------------------

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND NATURE OF BUSINESS - Harvest States Cooperatives Wheat
Milling Defined Business Unit (the Defined Business Unit), formerly
known as Amber Milling Company, is a defined business unit of Harvest
States Cooperatives (the Company) and is not organized as a separate
legal entity. The purpose of the Defined Business Unit is to carry on
the operations of the Wheat Milling Division. The assets and liabilities
of the Defined Business Unit continue to be 100% owned by the Company.
In the year ended May 31, 1995, the Defined Business Unit was operated
as a joint venture in which the Company owned a 70% interest. Effective
June 1, 1995, the Company purchased the minority interest. The Defined
Business Unit operates commercial bakery and semolina flour milling
facilities in Rush City, Minnesota; Huron, Ohio; Kenosha, Wisconsin; and
Houston, Texas. These mills produce semolina and durum flour, which are
the primary ingredients in pasta products and wheat flour in the bakery
industry. The Defined Business Unit serves customers throughout the
United States.

CASH MANAGEMENT - The Defined Business Unit draws all of its cash
requirements from and deposits all cash generated with the Company's
centralized cash management system.

INVENTORIES - Grain and processed grain products are stated at market,
including adjustment for open purchase, sales, and futures contracts and
deferral of normal profit on processed grain products.

The Defined Business Unit follows the general policy of hedging its
grain inventories and unfilled orders for grain products to the extent
considered practicable for minimizing risk from market price
fluctuations. Futures contracts used for hedging are purchased and sold
through regulated commodity exchanges. Inventories, purchase
commitments, and sales commitments, however, are not completely hedged,
due in part to the absence of satisfactory hedging facilities for
certain commodities and geographical areas and, in part, to the Defined
Business Unit's appraisal of its exposure from expected price
fluctuations. Noncommodity exchange purchase and sale contracts may
expose the Defined Business Unit to risk in the event that a
counterparty to a transaction is unable to fulfill its contractual
obligation. The Defined Business Unit manages its risk by entering into
purchase contracts with preapproved producers and companies and by
establishing appropriate limits for individual suppliers. Sales
contracts are entered into with organizations of acceptable
creditworthiness, as internally evaluated.

OTHER ASSETS - Leasehold rights and other intangible assets are
amortized using the straight-line method over 15 to 18 years.

IMPAIRMENT OF LONG-LIVED ASSETS - Management periodically reviews the
carrying value of property and equipment for potential impairment by
comparing its carrying value to the estimated undiscounted future cash
flows expected to result from the use of these assets. Should the sum of
the related, expected future net cash flows be less than the carrying
value, an impairment loss would be recognized. An impairment loss would
be measured by the amount by which the carrying value of the asset
exceeds the fair value of the asset. In March of 1997, it was reported
that a major customer of the Defined Business Unit was closing five of
its ten North American plants. A substantial portion of the production
of the Defined Business Unit's Rush City mill (44.4% and 31.5% in 1997
and 1996, respectively) is sold to the plants to be closed. Because of
the likelihood of diminished demand for semolina from the Rush City
mill, management assessed the carrying amount of the Rush City mill
relative to expected future cash flows, and recorded a $2,000,000 charge
against earnings during the year ended May 31, 1997.

INCOME TAXES - Earnings generated on grain purchased by the Defined
Business Unit from nonmembers are characterized as nonpatronage and
taxable. Earnings generated on grain purchased from the Company are
considered to be patronage to the extent of the Company's patronage
purchase percentage of that particular commodity; the other portion of
those earnings is considered taxable.

Due to the high proportion of patronage earnings, deferred taxes
resulting from temporary differences are not significant.

SALES - Sales of processed grains are recognized upon shipment to
customers, net of freight charges.

REVENUE FROM SIGNIFICANT CUSTOMERS - Sales to two customers accounted
for 23% and 11% of total sales for the year ended May 31, 1997, 24% and
15% for the year ended May 31, 1996, and 17% and 14% for the year ended
May 31, 1995.

2. RECEIVABLES

May 31,
----------------------
1997 1996

Trade $ 26,857,249 $ 43,530,542
Other 324,792 459,530
Less allowance for losses (321,269) (240,938)
-------------- ---------------
$ 26,860,772 $ 43,749,134
============== ===============

3. INVENTORIES

May 31,
----------------------
1997 1996

Grain $ 10,556,495 $ 8,327,021
Processed grain products 1,295,324 629,647
Other 419,796 351,607
-------------- ---------------
$ 12,271,615 $ 9,308,275
============== ===============

4. OTHER ASSETS

May 31,
----------------------
1997 1996

Goodwill, less accumulated amortization of
$1,188,315 and $781,635, respectively $ 4,911,744 $ 5,318,424
Leasehold rights and other intangibles, less
accumulated amortization of $5,144,723 and
$4,484,723, respectively 6,902,811 7,562,812
-------------- ---------------
$ 11,814,555 $ 12,881,236
============== ===============

5. PROPERTY, PLANT, AND EQUIPMENT

Estimated
Useful Life May 31,
in Years ----------------------------------
1997 1996

Land $ 397,726 $ 181,420
Grain processing plants 15 to 45 29,767,710 30,835,636
Machinery and equipment 5 to 20 40,169,184 35,520,073
--------------- ----------------
70,334,620 66,537,129
Less accumulated depreciation (17,748,631) (14,677,871)
--------------- ----------------
52,585,989 51,859,258
Construction-in-progress 16,544,531 7,373,788
--------------- ----------------
$ 69,130,520 $ 59,233,046
=============== ================

During the years ended May 31, 1997, 1996, and 1995, the Defined
Business Unit capitalized interest of $588,731, $739,101 and $587,637,
respectively.

6. BORROWINGS

DUE TO HARVEST STATES COOPERATIVES:

The Defined Business Unit satisfies its working capital needs through
borrowings, both long and short-term, from the Company to the extent the
Company's borrowing capacity permits. Short-term borrowings of
$22,413,445 and $31,044,150 were outstanding on May 31, 1997 and 1996,
respectively.

by each division. This results in an effective borrowing rate that may
be different than what the division could obtain on an independent
basis.

May 31,
--------------------------------
1997 1996

Harvest States Cooperatives, with fixed and variable interest
rates from 6.43% to 8.75%, due in installments through 2005 $ 59,114,270 $ 51,700,000
Industrial Development and Public Grain Elevator Revenue Bonds, payable
through July 2004, with an interest rate of 7.4% 2,100,000 2,300,000
-------------- ---------------
61,214,270 54,000,000
Less current portion (10,005,000) (6,344,584)
-------------- ---------------
$ 51,209,270 $ 47,655,416
============== ===============

The principal maturities of outstanding long-term indebtedness
outstanding at May 31, 1997 are as follows:

Year ending May 31:
1998 $ 10,005,000
1999 10,005,000
2000 10,005,000
2001 8,130,000
2002 7,120,000
2003 and thereafter 15,949,270

7. DEFINED BUSINESS UNIT EQUITY

On May 31, 1997, the Company completed an offering for the sale of
Equity Participation Units (EPUs) in its Wheat Milling Defined Business
Unit to qualified subscribers. Qualified subscribers are identified as
Defined Members or representatives of Defined Members which have been
defined as persons actually engaged in the production of agricultural
products or associations of producers of agricultural products. The
purchasers of EPUs have the right and obligation to deliver annually the
number of bushels of wheat equal to the number of Units held. Beginning
in the fiscal year ended May 31, 1998, unit holders will participate in
the net patronage sourced income from operations of the Wheat Milling
Defined Business Unit as patronage refunds. EPUs represent an ownership
interest in the Company not the Defined Business Unit. The assets and
liabilities of the Defined Business Unit continue to be 100% owned by
the Company.

8. RETIREMENT PLANS

The Defined Business Unit, through the Company, has noncontributory
defined benefit retirement plans covering substantially all salaried and
full-time hourly employees. The retirement plan benefits for salaried
employees are based on years of service and the participants' total
compensation. Benefits for hourly employees are based on various monthly
amounts for each year of credited service. The plans are funded by
annual contributions to tax-exempt trusts in accordance with federal law
and regulations. Plan assets consist principally of corporate
obligations, U.S. Government bonds, money market funds, and immediate
participation guarantee contracts. Pension costs billed to the Defined
Business Unit for 1997, 1996, and 1995 were approximately $136,000,
$46,000, and $101,000, respectively. The Defined Business Unit's portion
of the actuarial present value or accumulated benefit obligations and
net pension assets available for benefits has not been determined.
Selected information at May 31 for the Company's plan is as follows:

1997 1996

Accumulated benefit obligation, including vested benefits
of $75,515,800 and $74,406,137, respectively $ 77,644,611 $ 77,127,866
Projected benefit obligation for services rendered to date 78,660,275 81,036,131
Plan assets at fair value 76,348,832 75,743,570

The determination of the actuarial present value of the projected
benefit obligation was based on a weighted average discount rate of
7.75% in 1997 and 1996 and 8.25% in 1995 and a rate of increase in
future compensation of 5% in 1997, 1996, and 1995. The expected
long-term rate of return on plan assets was 8.5% in 1997, 8% in 1996,
and 8.5% in 1995.

9. POSTRETIREMENT MEDICAL AND OTHER BENEFITS

The accrued postretirement medical and other benefits costs of the
Company that are not funded were as follows at May 31:

1997 1996

Unrecognized transition obligation (8,501,474) (9,430,105)
Unrecognized net gains 3,526,263 4,059,863
------------- --------------
Accrued postretirement medical and other benefits cost $ 3,204,145 $ 2,266,756
============= ==============

The net periodic costs billed to the Defined Business Unit for 1997,
1996, and 1995 were approximately $65,000, $42,000, and $44,000,
respectively.

10. PROVISION FOR INCOME TAXES

Results of operations of the Wheat Milling Defined Business Unit are
included in the consolidated federal income tax return of the Company.
The Company has a policy that provides for the payment of taxes on an
individual company basis for each of its defined business units and
divisions.

No significant deferred income tax provision was recorded by the Defined
Business Unit.

A reconciliation of the statutory federal tax rate to the effective rate
for the years ended May 31 follows:

1997 1996 1995

Statutory federal income tax rate 35.0% 35.0% 35.0%
State and local income taxes, net of federal income tax benefit 4.9 4.3 2.6
Patronage earnings (31.2) (35.6) (24.2)
Other (.2) 2.8 .2
------ ------ ------
Effective rate 8.5% 6.5% 13.6%
====== ====== ======

11. COMMITMENTS AND CONTINGENCIES

Leases for approximately 242 rail cars with remaining lease terms of one
to ten years are used by the Defined Business Unit. In addition, leases
for a milling facility, certain vehicles, and various manufacturing
equipment are used by the Defined Business Unit.

Minimum rental payments due under these operating leases at May 31, 1997
are as follows:

Milling
Rail Cars Facility Other Total

Years ending May 31:
1998 $ 1,682,625 $ 426,668 $ 42,384 $ 2,151,677
1999 1,549,590 440,004 32,902 2,022,496
2000 1,503,855 440,004 19,190 1,963,049
2001 1,279,020 440,004 2,645 1,721,669
2002 379,255 440,004 819,259
2003 and thereafter 2,546,668 2,546,668
------------- -------------- ------------- ---------------
$ 6,394,345 $ 4,733,352 $ 97,121 $ 11,224,818
============= ============== ============= ===============

Total rent expense, net of rail car mileage credits received from the
railroad and subleases, was approximately $2,144,838, $1,624,576, and
$1,180,836 for the years ended May 31, 1997, 1996, and 1995,
respectively. Mileage credits and sublease income were $375,667,
$338,700, and $321,909 for the years ended May 31, 1997, 1996, and 1995,
respectively.

At May 31, 1997, the operations of the Defined Business Unit had
outstanding grain purchase contracts of approximately 5,100,000 bushels
at prices for durum ranging from $5.06 per bushel to $6.00 per bushel
and prices for spring wheat ranging from $3.79 per bushel to $5.37 per
bushel. In addition, the operations of the Defined Business Unit had
outstanding sales contracts of both semolina and commercial baking flour
totaling approximately $40,714,000.

12. RELATED-PARTY TRANSACTIONS

Net sales for the year ended May 31, 1997, 1996, and 1995 included
$753,583, $647,416, and $321,768, respectively, to related parties.

The operations of the Defined Business Unit purchases substantially all
of its durum and wheat from the Company, a related party. Included in
cost of goods sold for the years ended May 31, 1997, 1996, and 1995 were
$138,000,000, $122,900,000, and $69,900,000, respectively, of these
purchases.

Additionally, the Company performs various direct management services
and incurs certain costs for its defined business units and divisions.
Such costs, including data processing, office services, and insurance,
are charged directly to the defined business units and divisions.
Indirect expenses, such as publications, board expense, executive
management, legal, finance, and human resources, are allocated to the
defined business units and divisions based on approximate usage. Costs
allocated to the Wheat Milling Defined Business Unit for the years ended
May 31, 1997, 1996, and 1995 were $1,000,000, $950,000, and $1,100,000,
respectively.

13. SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION

Additional information concerning supplemental disclosures of cash flow
activities for the years ended May 31 is as follows:

1997 1996 1995

Net cash paid during year for:
Interest $ 5,229,669 $ 4,457,797 $ 2,278,544
Income taxes 300,000 125,000 150,000