LAKE AREA CORN PROCESSORS LLC - Quarter Report: 2014 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the fiscal quarter ended June 30, 2014

o	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Commission file number 000-50254



LAKE AREA CORN PROCESSORS, LLC
(Exact name of registrant as specified in its charter)

South Dakota		46-0460790
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

46269 SD Highway 34 P.O. Box 100 Wentworth, South Dakota		57075
(Address of principal executive offices)		(Zip Code)

(605) 483-2676
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

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

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. x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

x Yes o No

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



Large accelerated filer o		Accelerated filer o
Non-accelerated filer x		Smaller Reporting Company o
(Do not check if a smaller reporting company)

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

As of August 14, 2014, there are 29,620,000 membership units of the registrant outstanding.

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INDEX



	Page No.
Part I FINANCIAL INFORMATION	3
Item 1. Financial Statements (Unaudited)	3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3. Quantitative and Qualitative Disclosures About Market Risk	21
Item 4. Controls and Procedures	22

Part II OTHER INFORMATION	23
Item 1. Legal Proceedings	23
Item 1A. Risk Factors	23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3. Defaults Upon Senior Securities	24
Item 4. Mine Safety Disclosures	24
Item 5. Other Information	24
Item 6. Exhibits	24
Signatures	24

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LAKE AREA CORN PROCESSORS, LLC

Consolidated Balance Sheets (Unaudited)



	June 30, 2014			December 31, 2013*
ASSETS

CURRENT ASSETS
Cash and cash equivalents	$	10,212,517		$	20,706,458
Accounts receivable	3,750,333			3,522,497
Other receivables	16,185			17,707
Inventory	8,287,780			6,874,207
Derivative financial instruments	2,932,596			1,502,574
Prepaid expenses	138,775			165,580
Total current assets	25,338,186			32,789,023

PROPERTY AND EQUIPMENT
Land	676,097			676,097
Land improvements	2,716,368			2,665,358
Buildings	8,277,636			8,277,636
Equipment	39,971,717			39,861,906
Construction in progress	5,590,295			199,302
	57,232,113			51,680,299
Less accumulated depreciation	(30,053,545		)	(28,722,235		)
Net property and equipment	27,178,568			22,958,064

OTHER ASSETS
Goodwill	10,395,766			10,395,766
Investments	20,601,156			16,078,269
Other	273,456			356,683
Total other assets	31,270,378			26,830,718

TOTAL ASSETS	$	83,787,132		$	82,577,805

* Derived from audited financial statements.

See Notes to Unaudited Consolidated Financial Statements.

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LAKE AREA CORN PROCESSORS, LLC

Consolidated Balance Sheets (Unaudited)




	June 30, 2014		December 31, 2013*
LIABILITIES AND MEMBERS’ EQUITY

CURRENT LIABILITIES
Accounts payable	$	5,588,046	$	11,953,957
Accrued liabilities	566,000		613,638
Derivative financial instruments	1,889,102		978,935
Current maturities of notes payable	1,279,786		1,281,760
Other	123,741		123,741
Total current liabilities	9,446,675		14,952,031

LONG-TERM LIABILITIES
Notes payable, net of current maturities	6,626,000		8,764,708
Other	403,884		405,884
Total long-term liabilities	7,029,884		9,170,592

COMMITMENTS AND CONTINGENCIES

MEMBERS' EQUITY (29,620,000 units issued and outstanding)	67,310,573		58,455,182

TOTAL LIABILITIES AND MEMBERS' EQUITY	$	83,787,132	$	82,577,805

* Derived from audited financial statements.

See Notes to Unaudited Consolidated Financial Statements.

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LAKE AREA CORN PROCESSORS, LLC

Consolidated Statements of Income (Unaudited)



	Three Months Ended June 30, 2014			Three Months Ended June 30, 2013			Six Months Ended June 30, 2014			Six Months Ended June 30, 2013

REVENUES	$	30,468,555		$	38,288,817		$	68,759,645		$	76,581,285

COSTS OF REVENUES	21,337,052			35,860,462			48,760,913			70,556,122

GROSS PROFIT	9,131,503			2,428,355			19,998,732			6,025,163

OPERATING EXPENSES	883,570			1,070,134			1,916,950			1,826,305

INCOME FROM OPERATIONS	8,247,933			1,358,221			18,081,782			4,198,858

OTHER INCOME (EXPENSE)
Interest income	18,808			20,655			26,878			29,306
Equity in net income of investments	2,071,801			88,813			4,287,887			219,115
Interest expense	(86,181		)	(9,646		)	(169,884		)	(43,192		)
Total other income	2,004,428			99,822			4,144,881			205,229

NET INCOME	$	10,252,361		$	1,458,043		$	22,226,663		$	4,404,087

BASIC AND DILUTED EARNINGS PER UNIT	$	0.35		$	0.05		$	0.75		$	0.15

WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING FOR THE CALCULATION OF BASIC & DILUTED EARNINGS PER UNIT	29,620,000			29,620,000			29,620,000			29,620,000

DISTRIBUTIONS DECLARED PER UNIT	$	0.25		$	0.10		$	0.45		$	0.10

See Notes to Unaudited Consolidated Financial Statements.

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LAKE AREA CORN PROCESSORS, LLC

Consolidated Statements of Cash Flows (Unaudited)



	Six Months Ended June 30, 2014			Six Months Ended June 30, 2013

OPERATING ACTIVITIES
Net income	$	22,226,663		$	4,404,087
Changes to net income affecting cash and cash equivalents
Depreciation and amortization	1,414,537			1,403,411
Equity in net income of investments	(4,287,887		)	(219,115		)
(Increase) decrease in
Receivables	(226,314		)	(1,300,125		)
Inventory	(1,413,573		)	2,356,150
Prepaid expenses	26,805			3,590
Derivative financial instruments	(519,855		)	2,470,842
Increase (decrease) in
Accounts payable	(6,365,911		)	(7,918,769		)
Accrued and other liabilities	(49,638		)	222,835
NET CASH PROVIDED BY OPERATING ACTIVITIES	10,804,827			1,422,906

INVESTING ACTIVITIES
Purchase of property and equipment	(5,551,814		)	(145,298		)
Purchase of investments	(235,000		)	(33,990		)
NET CASH USED IN INVESTING ACTIVITIES	(5,786,814		)	(179,288		)

FINANCING ACTIVITIES
Principal payments on long-term notes payable	(2,140,682		)	(385,402		)
Financing costs paid	—			(54,570		)
Distributions paid to LACP members	(13,371,272		)	(2,962,000		)
NET CASH (USED IN) FINANCING ACTIVITIES	(15,511,954		)	(3,401,972		)

NET (DECREASE) IN CASH	(10,493,941		)	(2,158,354		)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	20,706,458			7,662,901

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	10,212,517		$	5,504,547

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for interest	$	179,077		$	37,014

See Notes to Unaudited Consolidated Financial Statements

NOTE 1 . NATURE OF OPERATIONS

Principal Business Activity

Lake Area Corn Processors, LLC and subsidiary (the Company) is a South Dakota limited liability company.

The Company owns and manages Dakota Ethanol, LLC (Dakota Ethanol), a 40 million-gallon (annual nameplate capacity) ethanol plant, located near Wentworth, South Dakota. Dakota Ethanol sells ethanol and related products to customers located in North America.

In addition, the Company has investment interests in five companies related to ethanol. See note 4 for further details.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The unaudited financial statements contained herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America although the Company believes that the disclosures are adequate to make the information not misleading.

In the opinion of management, all adjustments considered necessary for a fair presentation have been included in the accompanying financial statements. The results of operations for the three and six months ended June 30, 2014 are not necessarily indicative of the results to be expected for a full year.

These financial statements should be read in conjunction with the financial statements and notes included in the Company’s audited financial statements for the year ended December 31, 2013, contained in the annual report on Form 10-K for 2013.

Principles of Consolidation

The consolidated financial statements of the Company include the accounts of its wholly owned subsidiary, Dakota Ethanol. All significant inter-company transactions and balances have been eliminated in consolidation.

Revenue Recognition

Revenue from the production of ethanol and related products is recorded when title transfers to customers. Generally, ethanol and related products are shipped FOB shipping point, based on written contract terms between Dakota Ethanol and its customers. Collectability of revenue is reasonably assured based on historical evidence of collectability between Dakota Ethanol and its customers. Interest income is recognized as earned.

Shipping costs incurred by the Company in the sale of ethanol, dried distiller's grains and corn oil are not specifically identifiable and as a result, revenue from the sale of those products is recorded based on the net selling price reported to the Company from the marketer.

Cost of Revenues

The primary components of cost of revenues from the production of ethanol and related co-product are corn expense, energy expense (natural gas and electricity), raw materials expense (chemicals and denaturant), and direct labor costs.

Shipping costs on modified and wet distiller’s grains are included in cost of revenues.

Inventory Valuation

Ethanol inventory, raw materials, work-in-process, and parts inventory are valued using methods which approximate the lower of cost (first-in, first-out) or market. Distillers grains and related products are stated at net realizable value. In the valuation of inventories and purchase and sale commitments, market is based on current replacement values except that it does not exceed net realizable values and is not less than net realizable values reduced by allowances for approximate normal profit margin.

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LAKE AREA CORN PROCESSORS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2014 and 2013

Investment in commodities contracts, derivative instruments and hedging activities

The Company is exposed to certain risks related to our ongoing business operations. The primary risks that we manage by using forward or derivative instruments are price risk on anticipated purchases of corn, natural gas and the sale of ethanol.

The Company is subject to market risk with respect to the price and availability of corn, the principal raw material we use to produce ethanol and ethanol by-products. In general, rising corn prices result in lower profit margins and, therefore, represent unfavorable market conditions. This is especially true when market conditions do not allow us to pass along increased corn costs to our customers. The availability and price of corn is subject to wide fluctuations due to unpredictable factors such as weather conditions, farmer planting decisions, governmental policies with respect to agriculture and international trade and global demand and supply.

Certain contracts that literally meet the definition of a derivative may be exempted from derivative accounting as normal purchases or normal sales. Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. Contracts that meet the requirements of normal purchases or sales are documented as normal and exempted from the accounting and reporting requirements of derivative accounting.

The Company does not apply the normal purchase and sales exemption for forward corn purchase contracts. As of June 30, 2014, we are committed to purchasing 3.7 million bushels of corn on a forward contract basis with an average price of $4.23 per bushel. Dakota Ethanol has a net derivative financial instrument liability of approximately $1,900,000 related to the forward contracted purchases of corn. The corn purchase contracts represent 21% of the annual plant corn usage.

The Company enters into firm-price purchase commitments with some of our natural gas suppliers under which we agree to buy natural gas at a price set in advance of the actual delivery of that natural gas to us. Under these arrangements, we assume the risk of a price decrease in the market price of natural gas between the time this price is fixed and the time the natural gas is delivered. At June 30, 2014, we are not committed to purchasing any natural gas. We account for these transactions as normal purchases, and accordingly, do not mark these transactions to market.

The Company enters into short-term forward, option and futures contracts for corn and natural gas as a means of managing exposure to changes in commodity and energy prices. The Company enters into short-term forward, option and futures contracts for sales of ethanol to manage exposure to changes in energy prices. All of our derivatives are designated as non-hedge derivatives, and accordingly are recorded at fair value with changes in fair value recognized in net income. Although the contracts are considered economic hedges of specified risks, they are not designated as and accounted for as hedging instruments.

As part of our trading activity, the Company uses futures and option contracts offered through regulated commodity exchanges to reduce risk and we are exposed to risk of loss in the market value of inventories. To reduce that risk, we generally take positions using forward and futures contracts and options.

Derivatives not designated as hedging instruments at June 30, 2014 and December 31, 2013 were as follows:



	Balance Sheet Classification	June 30, 2014			December 31, 2013*
Futures contracts in gain position	Current Assets	$	1,332,413		$	249,688
Total forward and futures contracts		1,332,413			249,688
Cash held by broker		1,600,183			1,252,886
	Current Assets	$	2,932,596		$	1,502,574

Forward contracts in loss position	(Current Liabilities)	$	(1,889,102	)	$	(978,935	)

*Derived from audited financial statements.

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LAKE AREA CORN PROCESSORS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2014 and 2013

Futures contracts and cash held by broker are all with one party and the right of offset exists. Therefore, on the balance sheet, these items are netted in one balance regardless of position.

Forward contracts are with multiple parties and the right of offset does not exist. Therefore, these contracts are reported at the gross amounts on the balance sheet.

Realized and unrealized gains and losses related to derivative contracts related to corn and natural gas purchases are included as a component of cost of revenues and derivative contracts related to ethanol sales are included as a component of revenues in the accompanying financial statements.



	Statement of Operations	Three Months Ended June 30,
	Classification	2014			2013
Net realized and unrealized gains (losses) related to purchase contracts:
Futures contracts	Cost of Revenues	$	2,543,696		$	524,907
Forward contracts	Cost of Revenues	(2,002,175		)	(989,146		)



	Statement of Operations	Six Months Ended June 30,
	Classification	2014			2013
Net realized and unrealized gains (losses) related to purchase contracts:
Futures contracts	Cost of Revenues	$	(169,978	)	$	285,492
Forward contracts	Cost of Revenues	(1,988,023		)	(1,052,097		)

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the fair value of derivative financial instruments, lower of cost or market accounting for inventory and forward purchase contracts and goodwill impairment evaluation.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 660): Summary and Amendments that Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs-Contracts with Customers (Subtopic 340-40). The guidance in this update supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the industry topics of the codification. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2016. The Company is currently assessing the impact that this guidance will have on its consolidated financial statements, but does not expect the guidance to have a material impact on the Company's consolidated financial statements.

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LAKE AREA CORN PROCESSORS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2014 and 2013

NOTE 3. INVENTORY

Inventory consisted of the following as of June 30, 2014 and December 31, 2013:



	June 30, 2014		December 31, 2013*
Raw materials	$	5,075,089	$	3,645,811
Finished goods	1,521,323		1,544,426
Work in process	726,934		748,965
Parts inventory	964,434		935,005
	$	8,287,780	$	6,874,207

*Derived from audited financial statements.

NOTE 4. INVESTMENTS

Dakota Ethanol has a 7% investment interest in the company’s ethanol marketer, Renewable Products Marketing Group, LLC (RPMG). The net income which is reported in the Company’s income statement for RPMG is based on RPMG’s March 31, 2014 unaudited interim results. The carrying amount of the Company’s investment was approximately $2,958,000 and $2,793,000 as of June 30, 2014 and December 31, 2013, respectively.

Dakota Ethanol has a 9% investment interest in Prairie Gold Venture Partnership, LLC (PGVP), a venture capital fund investing in cellulosic ethanol production. The net income which is reported in the Company’s income statement for PGVP is based on PGVP’s December 31, 2013 unaudited interim financials. The carrying amount of the Company’s investment was approximately $1,174,000 and $1,174,000 as of June 30, 2014 and December 31, 2013, respectively.

Dakota Ethanol has a 10% investment interest in Lawrenceville Tanks, LLC (LT), a partnership to construct and operate an ethanol storage terminal in Georgia. The net income which is reported in the Company’s income statement for LT is based on LT’s June 30, 2014 unaudited interim results. The carrying amount of the Company’s investment was approximately $330,000 and $110,000 as of June 30, 2014 and December 31, 2013, respectively.

Lake Area Corn Processors has a 10% investment interest in Guardian Hankinson, LLC (GH), a partnership to operate an ethanol plant in North Dakota. The net income which is reported in the Company’s income statement for GH is based on GH’s June 30, 2014 unaudited interim results. The carrying amount of the Company’s investment was approximately $16,123,000 and $12,000,000 as of June 30, 2014 and December 31, 2013, respectively.

Lake Area Corn Processors has a 17% investment interest in Guardian Energy Management, LLC (GEM), a partnership to provide management services to ethanol plants. The net income which is reported in the Company’s income statement for GEM is based on GEM’s June 30, 2014 unaudited interim results. The carrying amount of the Company’s investment was approximately $15,000 as of June 30, 2014. 2014 is the initial investment year.

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LAKE AREA CORN PROCESSORS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2014 and 2013

Condensed, combined unaudited financial information of the Company’s investments in RPMG, PGVP, LT, GH and GEM is as follows:



Balance Sheet	June 30, 2014		December 31, 2013
Current Assets	$	358,464,862	$	165,653,623
Other Assets	178,328,662		184,749,457
Current Liabilities	283,217,749		116,462,830
Long-term Debt	40,594,794		67,216,061
Members' Equity	212,980,983		166,724,189

	Three Months Ended
Income Statement	June 30, 2014		June 30, 2013
Revenue	$	82,363,732	$	2,241,237
Gross Profit	27,469,034		2,241,237
Net Income	20,970,588		1,154,573

The Company recorded equity in net income of approximately $4,123,000 and $1,988,000 from GH for the six and three months ended June 30, 2014, respectively. 2013 is the initial investment year for GH. The Company recorded equity in net income of approximately $165,000 and $84,000 from our other investments for the six and three months ended June 30, 2014, respectively. The Company recorded equity in net income of approximately $219,000 and $89,000 from our other investments for the six and three months ended June 30, 2013, respectively.

NOTE 5. REVOLVING OPERATING NOTE

On May 15, 2013, Dakota Ethanol executed a revolving promissory note from Farm Credit Services of America (FCSA) in the amount of $10,000,000 and the amount available is subject to a borrowing base. Interest on the outstanding principal balances will accrue at 310 basis points above the 1 month LIBOR rate and is not subject to a floor. The rate was 3.25% at June 30, 2014. There is a non-use fee of 0.25% on the unused portion of the $10,000,000 availability. The note is collateralized by the ethanol plant and equipment, its accounts receivable and inventory. The note expires on May 31, 2015. On June 30, 2014 and December 31, 2013, Dakota Ethanol had $0 outstanding and $10,000,000 available to be drawn on the revolving promissory note.

NOTE 6. LONG-TERM NOTES PAYABLE

Dakota Ethanol has two long-term notes payable with FCSA. As part of the note payable agreements, Dakota Ethanol is subject to certain restrictive covenants establishing financial reporting requirements, distribution and capital expenditure limits, debt service coverage ratios and minimum working capital requirements. The notes are collateralized by the ethanol plant and equipment, its accounts receivable and inventory.

On May 15, 2013, Dakota Ethanol executed a revolving promissory note from Farm Credit Services of America (FCSA) in the amount of $5,000,000. Interest on the outstanding principal balance will accrue at 335 basis points above the 1 month LIBOR rate and is not subject to a floor. The rate was 3.50% at June 30, 2014. Dakota Ethanol may elect to borrow any principal amount repaid on the note up to $5,000,000 subject to the terms of the agreement. Should Dakota Ethanol elect not to utilize this feature, the lender will assess a non-use fee of 0.35% on the unused portion of the note. The note matures on May 31, 2018. On June 30, 2014 and December 31, 2013, Dakota Ethanol had $1,000 outstanding and $4,999,000 available to be drawn on the note.

On December 19, 2013, Dakota Ethanol executed a term note from FCSA in the amount of $10,000,000 to finance the investment in Guardian Hankinson, LLC. Interest on the outstanding principal balance will accrue at 335 basis points above the 1 month LIBOR rate and is not subject to a floor. The rate was 3.50% at June 30, 2014. The note requires quarterly principal payments of $312,500 plus accrued interest. The note matures on December 31, 2021.

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LAKE AREA CORN PROCESSORS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2014 and 2013

The balances of the notes payable are as follows:



	June 30, 2014			December 31, 2013*

Notes payable - FCSA	$	7,876,000		$	10,001,000
Note payable - Other	29,786			45,468
	7,905,786			10,046,468
Less current portion	(1,279,786		)	(1,281,760		)
	$	6,626,000		$	8,764,708

*Derived from audited financial statements

Minimum principal payments for the next five years are estimated as follows:



Years Ending June 30,	Amount
2015	$	1,279,786
2016	1,250,000
2017	1,250,000
2018	1,251,000
2019	1,250,000

NOTE 7. FAIR VALUE MEASUREMENTS

The Company complies with the fair value measurements and disclosures standard which defines fair value, establishes a framework for measuring fair value, and expands disclosure for those assets and liabilities carried on the balance sheet on a fair value basis.

The Company’s balance sheet contains derivative financial instruments that are recorded at fair value on a recurring basis. Fair value measurements and disclosures require that assets and liabilities carried at fair value be classified and disclosed according to the process for determining fair value. There are three levels of determining fair value.

Level 1 uses quoted market prices in active markets for identical assets or liabilities.

Level 2 uses observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3 uses unobservable inputs that are not corroborated by market data.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

Derivative financial instruments. Commodity futures and options contracts are reported at fair value utilizing Level 1 inputs. For these contracts, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the CBOT and NYMEX markets. Over-the-counter commodity options contracts are reported at fair value utilizing Level 2 inputs. For these contracts, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the over-the-counter markets. Forward purchase contracts are reported at fair value utilizing Level 2 inputs. For these contracts, the Company obtains fair value measurements from local grain terminal bid values. The fair value measurements consider observable data that may include live trading bids from local elevators and processing plants which are based off the CBOT markets.

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LAKE AREA CORN PROCESSORS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2014 and 2013

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2014 and December 31, 2013 segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:



	Total			Level 1		Level 2			Level 3
June 30, 2014

Assets:
Derivative financial instruments, futures contracts	$	1,332,413		$	1,332,413	$	—		$	—

Liabilities:
Derivative financial instruments, forward contracts	$	(1,889,102	)	$	—	$	(1,889,102	)	$	—

December 31, 2013*

Assets:
Derivative financial instruments, futures contracts	$	249,688		$	249,688	$	—		$	—

Liabilities:
Derivative financial instruments, forward contracts	$	(978,935	)	$	—	$	(978,935	)	$	—

*Derived from audited financial statements.

During the three and six months ended June 30, 2014, the Company did not make any changes between Level 1 and Level 2 assets and liabilities. As of June 30, 2014 and December 31, 2013, the Company did not have any Level 3 assets or liabilities.

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets and financial liabilities measured at fair value on a non-recurring basis were not significant at June 30, 2014.

Disclosure requirements for fair value of financial instruments require disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non recurring basis are discussed above. The methodologies for other financial assets and financial liabilities are discussed below.

The Company believes the carrying amount of cash and cash equivalents (level 1), accounts receivable (level 2), other receivables (level 2), accounts payable (level 2) and short-term notes payable (level 3) approximates fair value due to the short maturity of these instruments.

The carrying amount of long-term notes payable (level 3) approximates fair value based on estimated interest rates for comparable debt.

NOTE 8. RELATED PARTY TRANSACTIONS

Dakota Ethanol has a 7% interest in RPMG, and Dakota Ethanol has entered into an ethanol marketing agreement with RPMG for the exclusive rights to market, sell and distribute the entire ethanol and corn oil inventory as well as all dried distillers grains produced by Dakota Ethanol. The marketing fees are included in net revenues.

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LAKE AREA CORN PROCESSORS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2014 and 2013

Sales and marketing fees related to the agreements are as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013

Revenue - ethanol	$	23,786,271	$	29,363,677	$	54,707,748	$	57,038,053
Revenue - distiller's grains and corn oil	2,994,070		1,841,800		5,583,830		3,626,371

Marketing fees - ethanol	32,903		64,152		65,805		128,304
Marketing fees - distillers grains and corn oil	16,206		9,288		30,874		18,761

	June 30, 2014		December 31, 2013*
Amounts due included in accounts receivable	$	3,055,707	$	2,382,068

*Derived from audited financial statements.

NOTE 9. COMMITMENTS

Dakota Ethanol has committed to contracts to upgrade various components of the plant. The total value of the contracts is approximately $7 million. As of June 30, 2014, we have paid $3.3 million in costs related to this project. The projects are expected to be completed in the third quarter of 2014. Dakota Ethanol will pay for the upgrades with cash flows from operations and the long-term revolving debt currently in place.

NOTE 10. SUBSEQUENT EVENTS

During July 2014, the Company declared and paid a distribution to its members of $2,962,000, or $0.10 per capital unit.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We prepared the following discussion and analysis to help you better understand our financial condition, changes in our financial condition, and results of operations for the three and six month periods ended June 30, 2014, compared to the same periods of the prior year. This discussion should be read in conjunction with the consolidated financial statements and the Management's Discussion and Analysis section for the fiscal year ended December 31, 2013, included in the Company's Annual Report on Form 10-K for 2013.

Disclosure Regarding Forward-Looking Statements

This report contains historical information, as well as forward-looking statements that involve known and unknown risks and relate to future events, our future financial performance, or our expected future operations and actions. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "future," "intend," "could," "hope," "predict," "target," "potential," "continue" or the negative of these terms or other similar expressions. These forward-looking statements are only our predictions based on current information and involve numerous assumptions, risks and uncertainties. Our actual results or actions may differ materially from these forward-looking statements for many reasons, including the reasons described in this report and our annual report on Form 10-K for the fiscal year ended December 31, 2013.

The cautionary statements referred to in this section also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We undertake no duty to update these forward-looking statements, even though our situation may change in the future. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits completely and with the understanding that our actual future results may be materially different from what we currently expect. We qualify all of our forward-looking statements by these cautionary statements.

Overview

Lake Area Corn Processors, LLC is a South Dakota limited liability company that owns and manages its wholly-owned subsidiary, Dakota Ethanol, L.L.C. Dakota Ethanol, L.L.C. owns and operates an ethanol plant located near Wentworth, South Dakota that has a nameplate production capacity of 40 million gallons of ethanol per year. Lake Area Corn Processors, LLC is referred to in this report as "LACP," the "company," "we," or "us." Dakota Ethanol, L.L.C. is referred to in this report as "Dakota Ethanol" "we" "us" or the "ethanol plant."

Our revenue is derived from the sale and distribution of our ethanol, distillers grains and corn oil. The ethanol plant currently operates in excess of its nameplate capacity, producing approximately 48 million gallons of ethanol per year. Corn is supplied to us primarily from our members who are local agricultural producers and from purchases of corn on the open market. We have engaged Renewable Products Marketing Group, Inc. ("RPMG") to market all of the ethanol and corn oil that we produce at the ethanol plant. Further, RPMG, Inc. markets all of the distillers grains that we produce that we do not market internally to local customers.

We are in the process of making approximately $7 million in capital improvements to the ethanol plant related to various equipment upgrades designed to improve our energy efficiency and increase our total production by eliminating bottlenecks in our production process. As of June 30, 2014, we have paid $3.3 million in costs related to this project. We anticipate that these projects will be completed by the end of our third quarter of 2014. We plan to finance the plant upgrades using cash from our operations and amounts we have available to borrow on our long-term revolving debt. Management does not anticipate securing additional equity or debt financing in order to complete these projects.

To date, we have paid a total of $16,291,000 in distributions to our members or $0.55 per membership unit, during our 2014 fiscal year. This amount includes a $0.10 per unit distribution which was declared and paid in July 2014 after the end of our second quarter of 2014.

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Results of Operations

Comparison of the Fiscal Quarters Ended June 30, 2014 and 2013

The following table shows the results of our operations and the percentage of revenues, cost of revenues, operating expenses and other items to total revenues in our consolidated statements of income for the fiscal quarters ended June 30, 2014 and 2013:



	2014			2013
Income Statement Data	Amount		%	Amount		%
Revenues	$	30,468,555	100.0	$	38,288,817	100.0

Cost of Revenues	21,337,052		70.0	35,860,462		93.7

Gross Profit	9,131,503		30.0	2,428,355		6.3

Operating Expense	883,570		2.9	1,070,134		2.8

Income from Operations	8,247,933		27.1	1,358,221		3.5

Other Income	2,004,428		6.6	99,822		0.3

Net Income	$	10,252,361	33.6	$	1,458,043	3.8

Revenues

Revenue from ethanol sales decreased by approximately 19% during our second quarter of 2014 compared to the same period of 2013. Revenue from distillers grains sales decreased by approximately 28% during our second quarter of 2014 compared to the same period of 2013. Revenue from corn oil sales decreased by approximately 2% during our second quarter of 2014 compared to the same period of 2013. Despite these decreases in revenue, we continue to experience strong operating margins due to comparatively larger decreases in our cost of revenues.

Ethanol

Our ethanol revenue was approximately $5.5 million less during our second quarter of 2014 compared to our second quarter of 2013, a decrease of approximately 19%. This decrease in ethanol revenue was due to a decrease in both the amount of ethanol we sold and the average price we received for the ethanol we sold during our second quarter of 2014 compared to our second quarter of 2013. We sold approximately 10% fewer gallons of ethanol during our second quarter of 2014 compared to the same period of 2013, a decrease of approximately 1,200,000 gallons, due to rail logistics issues which required us to produce and sell less ethanol. Management anticipates continued difficulty with ethanol transportation logistics as the railroads work to increase capacity to meet current demand. Management anticipates that as we complete our plant upgrade projects, we will experience increased ethanol production in our fourth quarter of 2014, provided we can continue to ship our ethanol in a timely manner in order to continue operating at capacity. However, if economic factors in the ethanol industry occur, such as a reduction or elimination of the Federal Renewable Fuels Standard (RFS) for 2014, we may be forced to reduce production.

The average price we received for our ethanol was approximately $0.24 per gallon less during our second quarter of 2014 compared to our second quarter of 2013, a decrease of approximately 10%. Management attributes this decrease in ethanol prices with lower corn prices during our 2014 fiscal year which typically results in lower ethanol prices. Management anticipates continued lower ethanol prices due to anticipated lower corn prices and relatively stable ethanol demand. However, if the EPA significantly reduces the RFS requirement for corn-based ethanol for 2014, it could negatively impact demand for ethanol and may result in lower ethanol prices for the rest of our 2014 fiscal year.

Ethanol prices have recently been supported by rail logistics issues which have restricted ethanol supplies in the United States. During 2014, many ethanol producers have experienced delays in shipping their ethanol by rail as a result of a combination of poor weather conditions and a lack of shipping capacity by the railroads. Management believes that due to increased economic activity in the United States, including an improved corn crop in the fall of 2013, the railroads have experienced increased demand for rail shipments. Management believes that the railroads do not have sufficient infrastructure and manpower to accommodate this increased demand. As a result, shipments of ethanol have been delayed which have reduced ethanol supply in the market and resulted in increased ethanol prices. Management anticipates that ethanol prices will continue to be supported by the supply

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constraints until rail shipping times normalize. While these shipping delays have been reduced as the weather has improved following the winter months, management believes that until the railroads increase capacity to accommodate increased demand, these delays may occur in the future.

Distillers Grains

Our total distillers grains revenue decreased by approximately 28% during our second quarter of 2014 compared to the same period of 2013 due to decreased distillers grains prices and production. For our second quarter of 2014, we sold approximately 37% of our total distillers grains in the dried form and approximately 63% of our total distillers grains in the modified/wet form. By comparison, for our second quarter of 2013, we sold approximately 13% of our total distillers grains in the dried form and approximately 87% of our total distillers grains in the modified/wet form. We experienced premium pricing for our dried distillers grains during our first two quarters of 2014 and as a result we produced more distillers grains in the dried form. We determine the mix between dried distillers grains and modified/wet distillers grains we sell based on market conditions and the relative profitability of selling the different forms of distillers grains. We consume additional natural gas when we produce dried distillers grains as compared to modified/wet distillers grains which can impact the profit we generate from sales of dried distillers grains. Management anticipates that we will maintain the current mix between dried distillers grains and modified/wet distillers grains going forward unless market conditions change in a way that favors one product over the other.

The average price we received for our dried distillers grains was approximately 23% less during our second quarter of 2014 compared to the same period of 2013, a decrease of approximately $54 per ton. The average price we received for our modified/wet distillers grains was approximately 26% less for our second quarter of 2014 compared to the same period of 2013, a decrease of approximately $64 per ton. Management attributes the decrease in the selling price of our distillers grains with decreasing corn and feed prices. Distillers grains prices typically fluctuate based on the price of corn, soy bean meal and other competing feed products.

Management anticipates that distillers grains prices will continue to follow the corn and soy bean meal market. Due to the fact that corn prices have decreased since the harvest in the fall of 2013 and management anticipates continued lower corn prices during our 2014 fiscal year.

Corn Oil

Our total pounds of corn oil sold increased by approximately 9% during our second quarter of 2014 compared to the same period of 2013, an increase of approximately 199,000 pounds, primarily due to improved operating efficiency by our corn oil extraction equipment. This increase in corn oil extraction occurred despite the fact that the corn we are using during our 2014 fiscal year tends to have less corn oil compared to the corn we were using during our 2013 fiscal year. Management anticipates that corn oil production will continue to be variable based on the total production of ethanol at our plant and by operating efficiencies we achieve at the ethanol plant. Offsetting the increase in corn oil production was a decrease in the average price we received for our corn oil of approximately 9% for our second quarter of 2014 compared to the same period of 2013, a decrease of approximately $0.04 per pound. This decrease in market corn oil prices was primarily due to lower corn oil demand. The biodiesel industry has been impacted by recent legislative changes, including the expiration of the biodiesel blenders' tax credit and uncertainty regarding the biodiesel use requirements for 2014 under the RFS. Since biodiesel production is a major source of corn oil demand, lower biodiesel demand has impacted corn oil prices. In addition, corn oil prices have been impacted by lower corn prices. Management anticipates continued lower corn oil prices as additional corn oil supply enters the market along with volatile corn oil demand.

Cost of Revenues

The primary raw materials we use to produce our products are corn and natural gas. Our cost of revenues relating to corn was approximately 46% less for our second quarter of 2014 compared to the same period of 2013 due to lower corn prices and corn consumption during the 2014 period. Our average cost per bushel of corn decreased by approximately 44% for our second quarter of 2014 compared to our second quarter of 2013. Management attributes the decrease in corn prices with lower market corn prices as a result of the large corn crop which was harvested in the fall of 2013. Management anticipates continued lower corn prices during our 2014 fiscal year unless we were to experience either localized or national poor growing conditions which negatively impact the amount of corn harvested in the fall of 2014.

We used approximately 4% less bushels of corn during our second quarter of 2014 compared to the same period of 2013 due to decreased production at the ethanol plant. Management anticipates that our corn consumption will remain at current levels until our plant upgrade project is complete which will likely result in increased corn consumption due to anticipated increases in ethanol production.

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Our cost of revenues related to natural gas increased by approximately $66,000, an increase of approximately 4%, for our second quarter of 2014 compared to our second quarter of 2013. This increase was due to an increase in market natural gas prices during our second quarter of 2014 compared to the same period of 2013. Management attributes the higher natural gas prices during 2014 to a longer and colder winter which reduced natural gas supplies in the United States. Our average cost per MMBtu of natural gas during our second quarter of 2014 was approximately 7% higher compared to the price for our second quarter of 2013. While domestic natural gas supplies have started to return to more normal levels, management anticipates higher natural gas prices will continue in our 2014 fiscal year. If we experience another cold and long winter in 2014/2015, these high natural gas prices will likely return and may increase.

We used approximately 2% less MMBtus of natural gas during our second quarter of 2014 compared to the same period of 2013 due to decreased production during the 2014 period. Management anticipates that our natural gas consumption will remain at current levels despite anticipated increases in production due to energy efficiency projects we are pursuing as part of our plant upgrade projects.

Operating Expenses

Our operating expenses were lower for our second quarter of 2014 compared to the same period of 2013 due primarily to a one-time pledge to support a technical development center that we paid in 2013 partially offset by increased wages and bonuses due to our increased profitability.

Other Income and Expense

Our income related to our investments was higher for our second quarter of 2014 compared to the same period of 2013 due to our investments in Guardian Hankinson, LLC and RPMG, our product marketer. We did not have the investment in Guardian Hankinson, LLC during the second quarter of 2013. We had more interest expense during our second quarter of 2014 compared to the same period of 2013 due to having more debt outstanding during the 2014 period.

Comparison of the Six Months Ended June 30, 2014 and 2013



	2014			2013
Income Statement Data	Amount		%	Amount		%
Revenues	$	68,759,645	100.0	$	76,581,285	100.0

Cost of Revenues	48,760,913		70.9	70,556,122		92.1

Gross Profit	19,998,732		29.1	6,025,163		7.9

Operating Expense	1,916,950		2.8	1,826,305		2.4

Income from Operations	18,081,782		26.3	4,198,858		5.5

Other Income	4,144,881		6.0	205,229		0.3

Net Income	$	22,226,663	32.3	$	4,404,087	5.8

Revenues

Revenue from ethanol sales decreased by approximately 4% during the six months ended June 30, 2014 compared to the same period of 2013. Revenue from distillers grains decreased by approximately 31% during the six months ended June 30, 2014 compared to the same period of 2013. Revenue from corn oil decreased by approximately 12% during the six months ended June 30, 2014 compared to the same period of 2013.

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Ethanol

Our ethanol revenue was approximately $2,268,000 less during the six months ended June 30, 2014 compared to the same period of 2013, a decrease of approximately 4%. The average price we received for our ethanol decreased by approximately 1% for the six months ended June 30, 2014 compared to the same period of 2013, a decrease of approximately$0.02 per gallon of ethanol sold. Our total gallons of ethanol sold during the six months ended June 30, 2014 was approximately 3% less than during the same period of 2013, a decrease of approximately 763,000 gallons. This decrease was due to logistics issues which required us to reduce production along with a longer maintenance shutdown.

Distillers Grains

Our total distillers grains revenue decreased by approximately $5,438,000 for the six months ended June 30, 2014 compared to the same period of 2013. We sold approximately 1% fewer tons of distillers grains during the six months ended June 30, 2014 compared to the same period of 2013. The average price we received for our dried distillers grains decreased by approximately $68 per ton, a decrease of approximately 28%, for the six months ended June 30, 2014 compared to the same period of 2013. The average price we received for our modified/wet distillers grains decreased by approximately $79 per ton, a decrease of approximately 30%, for the six months ended June 30, 2014 compared to the same period of 2013. For the six months ended June 30, 2014, we sold approximately 33% of our distillers grains in the dried form and approximately 67% in the modified/wet form. During the six months ended June 30, 2013, we sold approximately 11% of our distillers grains in the dried form and approximately 89% in the modified/wet form.

Corn Oil

Our total pounds of corn oil sold increased by approximately 1% during the six months ended June 30, 2014 compared to the same period of 2013 due to improved efficiency in operating our corn oil extraction equipment. Offsetting this increase in production, the average price we received for our corn oil decreased by approximately 11% for the six months ended June 30, 2014 compared to the same period of 2013.

Cost of Revenues

Our cost of revenues related to corn was approximately 40% less for the six months ended June 30, 2014 compared to the same period of 2013. Our average cost per bushel of corn decreased by approximately 40% for the six months ended June 30, 2014 compared to the same period of 2013, a decrease of approximately $2.78 per bushel of corn. We used approximately 1% fewer bushels of corn during the six months ended June 30, 2014 compared to the same period of 2013. Our cost of revenues related to natural gas increased by approximately $1,847,000, an increase of approximately 60%, for the six months ended June 30, 2014 compared to the same period of 2013. Our average cost per MMBtu of natural gas during the six months ended June 30, 2014 was approximately 61% higher compared to the same period of 2013, an increase of approximately $2.73 per MMBtu of natural gas. We used approximately 1% less natural gas during the six months ended June 30, 2014 compared to the same period of 2013. This decrease was due to decreased production at the plant.

Operating Expense

Our operating expenses increased by approximately 5%, or approximately $91,000, for the six months ended June 30, 2014 compared to the same period of 2013. This increase was due primarily to increased wages and bonuses due to our increased profitability. The increased wages were partially offset by a one-time pledge to support a technical development center that we paid in 2013.

Other Income and Expense

Our interest expense was higher for the six months ended June 30, 2014 compared to the same period of 2013 because of interest costs from our term-loan. We had more income from our investments during the six months ended June 30, 2014 compared to the same period of 2013 due primarily to our investment Guardian Hankinson, LLC and in our marketer, RPMG.

Changes in Financial Condition for the Six Months Ended June 30, 2014

Current Assets

We had less cash on hand at June 30, 2014 compared to December 31, 2013, primarily due to deferred corn payments and distributions which were paid during our 2014 fiscal year. The increase in our inventory is due to having more bushels of

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corn on hand at June 30, 2014 compared to December 31, 2013. We had more unrealized gains on our risk management positions as of June 30, 2014 compared to December 31, 2013 which increased the value of our derivative financial instruments at June 30, 2014.

Property and Equipment

Our net property and equipment was higher at June 30, 2014 compared to December 31, 2013 as a result of the capital improvements we are in the process of making, partially offset by regular depreciation of our equipment.

Other Assets

The value of our investments was higher at June 30, 2014 compared to December 31, 2013 primarily due to earnings from our investment in Guardian Hankinson, LLC that were retained in that entity.

Current Liabilities

Our accounts payable was significantly lower at June 30, 2014 compared to December 31, 2013 because our corn suppliers typically seek to defer payments for corn that is delivered at the end of the year for tax purposes which increases our accounts payable at that time. These deferred payments were made early in our first quarter of 2014. We had a greater liability associated with our derivative financial instruments at June 30, 2014 compared to December 31, 2013 due to unrealized losses on our risk management positions at June 30, 2014.

Long-Term Liabilities

The long-term portion of our notes payable was lower at June 30, 2014 compared to December 31, 2013 due to ongoing payments we made on our long-term debt during our 2014 fiscal year. In addition, in May 2014, we made a $1.5 million prepayment on our long-term loan which reduced the outstanding balance of our long-term loan.

Liquidity and Capital Resources

Our main sources of liquidity are cash generated from our continuing operations and amounts we have available to draw on our revolving lines of credit. Management does not anticipate that we will need to raise additional debt or equity financing in the next twelve months and management believes that our current sources of liquidity will be sufficient to continue our operations during that time period. We are in the process of implementing plant upgrades which we anticipate financing from operating cash and our existing loans.

Currently, we have two revolving loans which allow us to borrow funds for working capital. These two revolving loans are described in greater detail below in the section entitled "Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Indebtedness." As of June 30, 2014, we had $1,000 outstanding and $14,999,000 available to be drawn on these revolving loans, after taking into account the borrowing base calculation. Management anticipates that this is sufficient to maintain our liquidity and continue our operations.

The following table shows cash flows for the six months ended June 30, 2014 and 2013:



	Six Months Ended June 30,
	2014			2013
Net cash provided by operating activities	$	10,804,827		$	1,422,906
Net cash (used in) investing activities	(5,786,814		)	(179,288		)
Net cash (used in) financing activities	(15,511,954		)	(3,401,972		)

Cash Flow From Operations. Our operating activities provided more cash during the six months ended June 30, 2014 compared to the same period of 2013, primarily due to increased net income during the 2014 period offset by increases in our equity in the net income of our investments as well as cash we used to pay down our accounts payable during the 2014 period.

Cash Flow From Investing Activities. We used more cash for capital projects during the six months ended June 30, 2014 compared to the same period of 2013 as we complete our plant upgrade projects during the 2014 period.

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Cash Flow From Financing Activities. Our financing activities used more cash during the six months ended June 30, 2014 compared to the same period of 2013 due to increased payments on our long-term debt along with significantly more cash that we used for distributions during the 2014 period.

Indebtedness

Effective May 15, 2013, we entered into a new comprehensive credit facility with Farm Credit Services of America, PCA and Farm Credit Services of America, FLCA (collectively "FCSA"). Our FCSA credit facility replaced our prior loans with First National Bank of Omaha. Our new FCSA credit facility was originally comprised of a $10 million revolving operating line of credit (the "Operating Line") and a $5 million revolving term commitment (the "Term Revolver"). Our FCSA credit facility was amended in December 2013 to add an additional $10 million term loan (the "Term Loan"). All of our assets, including the ethanol plant and equipment, its accounts receivable and inventory, serve as collateral for our loans with FCSA.

Operating Line

The Operating Line has a two year term which matures on May 31, 2015. The total amount that we can draw on the Operating Line is restricted by a formula based on the amount of inventory, receivables and equity we have in certain CBOT futures positions. Interest on the Operating Line accrues at the one month London Interbank Offered Rate ("LIBOR") plus 310 basis points. There is a fee of 0.25% on the portion of the Operating Line that we are not using, which is billed quarterly. The interest rate for this loan at June 30, 2014 was 3.25%. As of June 30, 2014, we had $0 outstanding on the Operating Line and $10,000,000 available to be drawn, taking into account the borrowing base calculation.

Term Revolver

The Term Revolver has a five year term which matures on May 31, 2018. We can use the Term Revolver for draws required to maintain compliance with our working capital requirements, funding approved capital expenditures and funding approved investments in other ethanol production facilities. Interest on the Term Revolver accrues at the one month LIBOR plus 335 basis points. There is a fee of 0.35% on the portion of the Term Revolver that we are not using, which is billed quarterly. As of June 30, 2014, the interest rate was 3.50%. On June 30, 2014, we had $1,000 outstanding and $4,999,000 available to be drawn on this loan.

Term Loan

Our Term Loan has an eight year term which matures on December 31, 2021. We used the proceeds of the Term Loan to pay a portion of our capital contribution to Guardian Hankinson, LLC. The initial amount of the Term Loan was $10,000,000. Pursuant to the Term Loan, we make quarterly principal payments of $312,500 plus accrued interest with a final payment of all remaining principal and unpaid interest on the maturity date of December 31, 2021. Interest on the Term Loan accrues at a variable interest rate. Interest on the Term Loan accrues at the one-month LIBOR plus 3.35% until December 1, 2018. After December 1, 2018, interest on the Term Loan accrues at FCSA's cost of funds rate plus 3.35%. On June 30, 2014, the interest rate on the Term Loan was 3.50%. On June 30, 2014, we had $7,875,000 outstanding on the Term Loan.

Covenants

Our credit facilities with FCSA are subject to various loan covenants. If we fail to comply with these loan covenants, FCSA can declare us to be in default of our loans. The material loan covenants applicable to our credit facilities are our working capital covenant, local net worth covenant and our debt service coverage ratio. We are required to maintain working capital (current assets minus current liabilities) of at least $5 million. We are required to maintain local net worth (total assets minus total liabilities minus the value of certain investments) of at least $18 million. We are required to maintain a debt service coverage ratio of at least 1.25:1.00.

As of June 30, 2014, we were in compliance with all of our loan covenants. Management's current financial projections indicate that we will be in compliance with our financial covenants for the next 12 months and we expect to remain in compliance thereafter. Management does not believe that it is reasonably likely that we will fall out of compliance with our material loan covenants in the next 12 months. If we fail to comply with the terms of our credit agreements with FCSA, and FCSA refuses to waive the non-compliance, FCSA may require us to immediately repay all amounts outstanding on our loans.

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Application of Critical Accounting Policies

Management uses estimates and assumptions in preparing our consolidated financial statements in accordance with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Of the significant accounting policies described in the notes to our consolidated financial statements, we believe that the following are the most critical:

Derivative Instruments

We enter into short-term forward grain, option and futures contracts as a means of securing corn and natural gas for the ethanol plant and managing exposure to changes in commodity and energy prices. We enter into short-term forward, option and futures contracts for sales of ethanol to manage exposure to changes in energy prices. All of our derivatives are designated as non-hedge derivatives, and accordingly are recorded at fair value with changes in fair value recognized in net income. Although the contracts are considered economic hedges of specified risks, they are not designated as and accounted for as hedging instruments.

As part of our trading activity, we use futures and option contracts offered through regulated commodity exchanges to reduce our risk and we are exposed to risk of loss in the market value of inventories. To reduce that risk, we generally take positions using cash and futures contracts and options.

Unrealized gains and losses related to derivative contracts for corn and natural gas purchases are included as a component of cost of revenues and derivative contracts related to ethanol sales are included as a component of revenues in the accompanying financial statements. The fair values of derivative contracts are presented on the accompanying balance sheet as derivative financial instruments.

Lower of cost or market accounting for inventory

With the significant change in the prices of our main inputs and outputs, the lower of cost or market analysis of inventory can have a significant impact on our financial performance.

The impact of market activity related to pricing of corn and ethanol will require us to continuously evaluate the pricing of our inventory under a lower of cost or market analysis.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to the impact of market fluctuations associated with commodity prices as discussed below. We have no exposure to foreign currency risk as all of our business is conducted in U.S. Dollars. We have loans that are subject to variable interest rates. We use derivative financial instruments as part of an overall strategy to manage market risk. We use cash, futures and option contracts to hedge changes to the commodity prices of corn and natural gas. We do not enter into these derivative financial instruments for trading or speculative purposes, nor do we designate these contracts as hedges for accounting purposes.

Interest Rate Risk

We are exposed to market risk from changes in interest rates. Exposure to interest rate risk results primarily from holding loans which bear variable interest rates. As of June 30, 2014, we had $7,876,000 outstanding on our variable interest rate loans with interest accruing at a rate of 3.50%. Our variable interest rates are calculated by adding a set basis to LIBOR. If we were to experience a 10% increase in LIBOR, the annual effect such change would have on our income statement, based on the amount we had outstanding on our variable interest rate loans as of June 30, 2014, would be approximately $2,000.

Commodity Price Risk

We are exposed to market risk from changes in commodity prices. Exposure to commodity price risk results from our dependence on corn and natural gas in the ethanol production process. We seek to minimize the risks from fluctuations in the prices of corn and natural gas through the use of hedging instruments. In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate. Although we believe our hedge positions accomplish an economic hedge against our future purchases, they are not designated as such for hedge accounting purposes, which would match the gain or loss on our hedge

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positions to the specific commodity purchase being hedged. We are marking to market our hedge positions, which means as the current market price of our hedge positions changes, the gains and losses are immediately recognized in our cost of revenues.

The immediate recognition of hedging gains and losses can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged. We recorded an decrease to our cost of revenues of approximately $541,000 related to derivative instruments for the quarter ended June 30, 2014. We recorded an increase to our cost of revenues of approximately $464,000 related to derivative instruments for the quarter ended June 30, 2013. There are several variables that could affect the extent to which our derivative instruments are impacted by price fluctuations in the cost of corn or natural gas. However, it is likely that commodity cash prices will have the greatest impact on the derivatives instruments with delivery dates nearest the current cash price.

As of June 30, 2014, we were committed to purchasing approximately 3.7 million bushels of corn with an average price of $4.23 per bushel. These corn purchases represent approximately 21% of our expected corn usage for the next 12 months. As corn prices move in reaction to market trends and information, our income statement will be affected depending on the impact such market movements have on the value of our derivative instruments. Depending on market movements, crop prospects and weather, these price protection positions may cause immediate adverse effects to our financial results, but are designed to produce long-term positive growth for us.

A sensitivity analysis has been prepared to estimate our exposure to corn and natural gas price risk. Market risk related to these factors is estimated as the potential change in income resulting from a hypothetical 10% adverse change in the average cost of our corn and natural gas prices and average ethanol price as of June 30, 2014, net of the forward and future contracts used to hedge our market risk for corn and natural gas usage requirements. The volumes are based on our expected use and sale of these commodities for a one year period from June 30, 2014. The results of this analysis, which may differ from actual results, are as follows:



	Estimated Volume Requirements for the next 12 months (net of forward and futures contracts)	Unit of Measure	Hypothetical Adverse Change in Price		Approximate Adverse Change to Income
Ethanol	50,000,000	Gallons	10	%	$	10,500,000
Corn	15,851,385	Bushels	10	%	$	5,738,201
Natural Gas	1,400,000	MMBTU	10	%	$	644,000

For comparison purposes, our sensitivity analysis for our second quarter of 2013 is set forth below.



	Estimated Volume Requirements for the next 12 months (net of forward and futures contracts)	Unit of Measure	Hypothetical Adverse Change in Price		Approximate Adverse Change to Income
Ethanol	48,145,000	Gallons	10	%	$	11,410,365
Corn	15,840,930	Bushels	10	%	$	10,328,286
Natural Gas	1,300,639	MMBTU	10	%	$	487,740

ITEM 4. CONTROLS AND PROCEDURES.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosures.

Our management, including our Chief Executive Officer (the principal executive officer), Scott Mundt, along with our Chief Financial Officer (the principal financial officer), Rob Buchholtz, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2014. Based on this review and evaluation, these officers believe that our disclosure controls and procedures are effective in ensuring that material information related to us is recorded, processed, summarized and reported within the time periods required by the forms and rules of the Securities and Exchange Commission.

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For the fiscal quarter ended June 30, 2014, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

From time to time in the ordinary course of business, Dakota Ethanol or Lake Area Corn Processors may be named as a defendant in legal proceedings related to various issues, including, worker's compensation claims, tort claims, or contractual disputes. We are not currently involved in any material legal proceedings, directly or indirectly, and we are not aware of any claims pending or threatened against us or any of the managers that could result in the commencement of material legal proceedings.

ITEM 1A. RISK FACTORS.

The following risk factors are provided due to material changes from the risk factors previously disclosed in our annual report on Form 10-K. The risk factors set forth below should be read in conjunction with the risk factors section and the Management's Discussion and Analysis section for the fiscal year ended December 31, 2013, included in our annual report on Form 10-K.

Government incentives for ethanol production may be reduced or eliminated in the future, which could hinder our ability to operate at a profit. The ethanol industry is assisted by various federal incentives, most importantly the RFS set forth in the Energy Policy Act of 2005. The RFS helps support a market for ethanol that might disappear without this incentive. Recently, there have been proposals in Congress to reduce or eliminate the RFS. In addition, on November 15, 2013, the EPA announced a proposal to significantly reduce the RFS levels for 2014 from the statutory volume requirement of 18.15 billion gallons to 15.21 billion gallons and reduce the renewable volume obligations that can be satisfied by corn based ethanol from 14.4 billion gallons to 13 billion gallons. This proposal would also result in a lowering of the 2014 numbers below the 2013 level of 13.8 billion gallons. The EPA is also seeking comments on several petitions it has received for partial waiver of the statutory volumes for 2014. According to the RFS, the EPA only has authority to waive the requirements of the RFS, in whole or in part, provided one of two conditions are met. The conditions are: (1) there is inadequate domestic renewable fuel supply; or (2) implementation of the requirement would severely harm the economy or environment of a state, region or the United States. Many in the ethanol industry believe that neither of these two conditions have been met. However, any challenge to a reduction in the RFS may take time to work through the courts and the waiver may be implemented despite the legal challenges. If the EPA's proposal becomes a final rule which significantly reduces the RFS or if the RFS were to be otherwise reduced or eliminated, it may lead to a significant decrease in ethanol demand which could negatively impact our results of operations.

Lack of rail transportation infrastructure and delayed rail shipments could negatively impact our financial performance. The ethanol industry has recently been experiencing difficulty transporting the ethanol which is produced. This difficulty has impacted our operations. Ethanol is typically transported by rail. At times during our 2014 fiscal year, we have been required to reduce production due to these shipping delays. The slower rail shipments have been due to a combination of factors including increased shipments of corn, coal and oil by rail, decreased shipment capacity by the railroads due to fewer railroad crews, and poor weather conditions which have slowed rail travel and loading times. Management anticipates that these slower railcar shipments will continue until the rail transportation capacity in the United States increases. These delays in shipping our products have resulted in decreased revenue and have required us to reduce the amount of ethanol we produce which has a negative impact on our financial performance. If these rail shipment challenges continue, they may negatively impact our ability to operate the ethanol plant profitably which could reduce the value of our units.

If China's ban on imports of U.S. distillers grains continues, exports of distillers grains could be dramatically reduced which could have a negative effect on the price of distillers grains in the U.S. and affect our profitability. China, the largest buyer of distillers grains in the world, announced on June 9, 2014 that it would stop issuing import permits for U.S. distillers grains due to the presence of a genetically modified trait not approved by China for import. It is unknown how long this ban on U.S. distillers grains will continue. Even if China agrees to accept U.S. distillers grains in the future, it is expected that additional restrictions will be placed on such imports which may be difficult to satisfy. If export demand of distillers grains is significantly reduced, the price of distillers grains in the U.S. would likely decline which would have a negative effect on our revenue and could impact our ability to profitably operate which could in turn reduce the value of our units.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

The following exhibits are filed as part of this report.



Exhibit No.		Exhibit
31.1		Certificate Pursuant to 17 CFR 240.13a-14(a)*
31.2		Certificate Pursuant to 17 CFR 240.13a-14(a)*
32.1		Certificate Pursuant to 18 U.S.C. Section 1350*
32.2		Certificate Pursuant to 18 U.S.C. Section 1350*
101		The following financial information from Lake Area Corn Processors, LLC's Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013, (ii) Consolidated Statements of Income for the three and six month periods ended June 30, 2014 and 2013, (iii) Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013, and (iv) the Notes to Unaudited Consolidated Financial Statements.**

* Filed herewith.

** Furnished herewith

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



		LAKE AREA CORN PROCESSORS, LLC

Date:	August 14, 2014	/s/ Scott Mundt
		Scott Mundt
		President and Chief Executive Officer (Principal Executive Officer)

Date:	August 14, 2014	/s/ Rob Buchholtz
		Rob Buchholtz
		Chief Financial Officer (Principal Financial and Accounting Officer)