SOUTH DAKOTA SOYBEAN PROCESSORS LLC - Annual Report: 2011 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x            ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

¨            TRANSITION REPORT PURSUANT TO SECTION 13 OR

15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NO.  000-50253

SOUTH DAKOTA SOYBEAN PROCESSORS, LLC

(Exact Name of Registrant as Specified in its Charter)

100 Caspian Avenue, Post Office Box 500, Volga, South Dakota 57071

(Address of Principal Executive Offices)

(605) 627-9240

(Registrant’s Telephone Number)

SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:

CLASS A CAPITAL UNITS

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

o    Yes        x    No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

o    Yes        x    No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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 Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x   Yes        o    No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x

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

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

The aggregate market value of the registrant’s common stock held by non-affiliates at June 30, 2011 was approximately $16,152,950. The aggregate market value was computed by reference to the last sales price during the registrant’s most recently completed second fiscal quarter.

As of the day of this filing, there were 30,419,000 Class A capital units of the registrant outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of Form 10-K - Portions of the Information Statement for 2012 Annual Meeting of Members.

CAUTIONARY STATEMENT REGARDING

FORWARD-LOOKING INFORMATION

This Annual Report on Form 10-K and other reports issued by South Dakota Soybean Processors, LLC (including reports filed with the Securities and Exchange Commission (the “SEC” or “Commission”), contain “forward-looking statements” that deal with future results, expectations, plans and performance. Forward-looking statements may include statements which use words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “predict,” “hope,” “will,” “should,” “could,” “may,” “future,” “potential,” or the negatives of these words, and all similar expressions. These forward-looking statements are made based on our expectations and beliefs concerning future events affecting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed in or implied by these forward-looking statements. We do not undertake any responsibility to release publicly any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this report. Additionally, we do not undertake any responsibility to update you on the occurrence of any unanticipated events which may cause actual results to differ from those expressed or implied by the forward-looking statements contained in this report. Important factors that could cause actual results to differ materially from our expectations are disclosed under “Risk Factors” and elsewhere in this report. As stated elsewhere in this report such factors include, among others:

We are not under any duty to update the forward-looking statements contained in this report. We cannot guarantee future results or performance or what future business conditions will be like. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report.

PART I

Item 1.        Business.

Overview

South Dakota Soybean Processors, LLC (“we,” “us,” “our” or the “Company”) owns and operates a soybean processing plant and a soybean oil refinery in Volga, South Dakota. From 2003 to 2011, we operated a bio-based polyurethane facility until we closed its operations because of poor financial performance. We are owned by approximately 2,200 members. Our members principally reside in South Dakota and neighboring states, many of whom deliver and sell soybeans to our plant for processing. 

Our core business consists of processing locally grown soybeans into soybean meal and soybean oil. Approximately 80% of a bushel of soybeans (60 pounds) is processed into soybean meal or hulls, and the remaining 20% is extracted as oil. We sell the soybean meal primarily to resellers, feed mills, and livestock producers as livestock feed. We market and sell multiple grades of soybean oil in either crude or refined format.  Crude and refined soybean oil are marketed and sold to the food, biodiesel and chemical industries.  Under certain market conditions, we may register and deliver warehouse receipts for crude oil according to the terms and conditions of a Chicago Mercantile Exchange (CME) soybean oil futures contract.

 We strive to maintain a competitive position in the marketplace by producing high quality products, operating a highly efficient operation at the lowest possible cost, and adding value to our core products to capture larger margins. We continue to search for ways to improve our efficiencies by analyzing new methods of vertical integration, adding value to our products by investing in further processing of our products, and reviewing new applications for our products in the plastics and energy fields. While it is our objective to maximize the issuance of cash distributions to our members from profits generated through operations, we recognize the need to maintain our financial strength by reinvesting for our future.

General Development of Business

We were originally organized as a South Dakota cooperative in 1993. As a South Dakota cooperative, we were entitled to single-level, pass-through tax treatment on income generated through our members’ patronage. This allowed us to pass our income onto our members in the form of distributions without first paying taxes at the company level, similar to a partnership. However, as we grew, the continuing availability of this advantageous tax treatment became less secure. Accordingly, in 2001 the cooperative’s board of directors approved a plan to reorganize into a South Dakota limited liability company, which became effective on July 1, 2002. The transaction was an exchange of interests whereby the assets and liabilities of the cooperative were transferred for capital units of the newly formed limited liability company, Soybean Processors, LLC. The capital units were distributed to our members upon dissolution of the cooperative at a rate of one capital unit of the limited liability company for each share of equity stock owned in the cooperative. The distribution of capital units to our members was registered under the Securities Act of 1933, as amended. For financial statement purposes, no gain or loss was recorded as a result of the exchange transaction. Upon completion of the reorganization, the name of the limited liability company was changed to South Dakota Soybean Processors, LLC.

We began producing crude soybean oil, soybean meal and soybean hulls in late 1996. Since then we have made significant capital improvements and expanded our business to include the development of vertically integrated product lines and services. In 2002, we completed the construction of a refining facility and began refining crude soybean oil. In 2003, we acquired ownership and management control of Urethane Soy Systems Company (USSC), a company that produced and sold various soybean oil-based polyurethane products. In December 2011, we closed USSC’s operations because of poor financial performance.   In May 2011, we completed the construction of a deodorizer at our facility, which gives us the capacity to deodorize our refined oil and sell directly to customers in the food industry.

Industry Information

The soybean processing industry converts soybeans into soybean meal, soybean hulls and soybean oil. A bushel of soybeans typically yields approximately 44 pounds of meal, 4 pounds of hulls, and 11 pounds of crude oil when processed.  While the meal and hulls are mostly consumed by animals, food ingredients are the primary end use for the oil. Crude soybean oil is generally refined for use as salad and cooking oil, baking and frying fat, and to a more limited extent, for industrial uses. Increasingly, the sale of soybean oil for human consumption is impacted by the regulation of trans-fat. Trans-fat is created by the hydrogenation process of products such as soybean oil and plant oils. Since 2006, the U.S. Food and Drug Administration has required that food processors disclose the level of trans-fatty acids contained in their products. In addition, various local governments in the U.S. have enacted, or are considering enacting, restrictions on the use of trans-fats in restaurants. As a result, many food manufacturers have reduced the amount of hydrogenated soybean oil they include in their products or switched to other oils containing lower amounts of trans-fat.

 Soybean production is concentrated in the central U.S., Brazil, Argentina and China. In the 2011 harvest season, the U.S. produced approximately 3.056 billion bushels of soybeans or approximately 36% of estimated world production. The USDA estimates that approximately 52% of soybeans produced in the U.S. are processed domestically, 46% are exported as whole soybeans, and 2% are retained for seed and residual use. Historically, there has been an adequate supply of soybeans produced in South Dakota and upper Midwest for the soybean processing industry. In 2011, farm producers in South Dakota produced 150.5 million bushels of soybeans, ranking it seventh among the top producing states in the U.S. as represented in the following:

Soybean processing facilities are generally located close to adequate sources of soybeans and a strong demand for meal to decrease transportation costs. Soybean meal is predominantly consumed by poultry and swine in the U.S. On average, exports of soybean meal account for 20% to 25% of total production.

Soybean oil refineries are generally located close to processing plants. Oil is shipped throughout the U.S. and for export. Approximately 85% of domestic oil production is used in food applications and 15% in industrial applications.

Soybean crushing and refining margins are cyclical, characteristic of a mature, competitive industry. While the price of soybeans may fluctuate substantially from year to year, the prices of meal and oil generally track that of soybeans, although not necessarily on a one-for-one basis; therefore, margins can be variable.

The soybean industry continues diligently to introduce soy-based products as bio-based substitutes for various petroleum-based products. Such products include biodiesel, soy ink, lubricants, candles and plastics. Biodiesel, a substitute for standard, petroleum-based diesel fuel, experienced steady growth in the U.S. until 2008. Between 2008 and 2010, the biodiesel market became stagnant as a result of overcapacity in the industry, price volatility in the petroleum oil market, and volatile input costs. In 2011, the biodiesel market began to grow again because of increased demand stemming from expansion of the Renewable Fuel Standard (RFS) program and resumption of the biodiesel blenders’ tax credit.

Products & Services

Soybean Processing

We process soybeans at our crushing plant to extract the soybean oil from the protein and fiber portions of the soybean. Approximately 80% of a soybean bushel is processed and sold as soybean meal or hulls. The remaining percentage of the soybean is extracted as crude soybean oil. The crude soybean oil may be sold directly to customers or we may process the crude into refined oil for future sale.

Polyurethane

We previously produced a bio-based polyol called Soyol® which was used in industrial applications for the polyurethane industry. Soyol® was made from specially refined crude soybean oil which, upon reaction with other ingredients, formed polyurethane plastics. Soyol® was made as a renewable replacement for petrochemical based polyols. Polyurethanes are used in a variety of products such as insulation in buildings and appliances; seating; carpet backing and padding; shoe soles; roof coatings; mattresses and pillows; rigid panels; and bumpers and interiors in cars, tractors and trucks. We sold Soyol® to USSC which, in turn, marketed and sold to its customers Soyol® and polyurethane resin systems incorporating Soyol® . The resin systems included a spray-on insulation product called SoyTherm™, a spray-based coating product for various applications (such as bedliners) called BioTuff™, and several others. USSC’s operations were closed in December 2011because of a history of poor financial performance.

Raw Materials and Suppliers

We procure soybeans from local soybean producers and elevators. In 2011, soybean production in South Dakota was approximately 150 million bushels, compared to 157 million bushels in 2010, 175 million bushels in 2009, 138 million bushels in 2008 and 133.5 million bushels in 2007. Of this amount, we processed 24.4 million bushels in 2011, compared to 25.2 million bushels in 2010, 24.5 million bushels of soybeans in 2009, 26.5 million bushels in 2008 and 26.6 million bushels in 2007. We control the flow of soybeans into our facilities with a combination of pricing and contracting options. Threats to our soybean supply include weather, changes in government programs, and competition from other processors and export markets.

Utilities

We use natural gas and electricity to operate the crushing and refining plants. Natural gas is used in the boilers for processing heat and for drying soybeans. NorthWestern Corporation of Sioux Falls, South Dakota, provides for the delivery of natural gas to us on an interruptible basis. We are at risk to adverse price fluctuations in the natural gas market, but we have the capability to use fuel oil and biofuel as a back up for natural gas if delivery is interrupted or market conditions dictate. We also employ forward contracting to offset some of this risk. Our electricity is supplied by the City of Volga, South Dakota.

Employees

We currently employ approximately 80 individuals, all but eight of whom are full-time. We have no unions or other collective bargaining agreements.

Sales, Marketing and Customers

Our soybean meal is primarily sold to resellers, feed mills, and livestock producers as livestock feed. Our meal market is local (typically within 200 miles of our Volga facility), Western U.S., and Canada. We have two significant meal customers, Commodity Specialists Company, with facilities in Shawnee Mission, Kansas, and Minneapolis, Minnesota, and Archer Daniels Midland Company (ADM), with a facility in Mankato, Minnesota, to which our product is delivered. Prior to the addition of our deodorizer in March 2011, we sold our oil primarily as crude soybean oil to various companies in the refining industry which typically processes the oil for human consumption. Following the installation of a new deodorizer in March 2011, we began selling refined oil directly to the food industry for human consumption and to the biodiesel industry. Our Soyol® and polyurethane resin systems incorporating Soyol® were primarily sold to companies within the housing and auto industries prior to our closing down of USSC’s operations in December 2011.

The table presented below represents the percentage of sales by quantity of product sold within various markets for 2011.

Over half of our products are shipped by rail, the service of which is provided by the Canadian Pacific (CP) rail line, with connections to the Burlington-Northern Santa Fe (BNSF) and the Union Pacific (UP) rail lines. All of our assets and operations are domiciled in the U.S., and all of the products sold are produced in the U.S.

Dependence upon a Single Customer

None.

Competition

We are in direct competition with several other soybean processing companies in the U.S., many of which have significantly greater resources than we do. The U.S. soybean processing industry is comprised primarily of 16 different companies operating 64 plants in the U.S. It is a mature, consolidated and vertically-integrated industry with four companies controlling nearly 84% of the processing industry. Those four companies are Archer Daniels Midland (ADM), Bunge, Cargill and Ag Processing (AGP). The U.S. vegetable oil (including soybean oil) refining industry is divided between oilseed processors and independent vegetable oil refiners. The oilseed processors operate approximately 83% of the vegetable oil refining capacity in the U.S., and ADM, Bunge, Cargill and AGP operate approximately 68% of the oil refining capacity. The three largest independent vegetable oil refiners are ACH Foods (in joint venture with ADM), Smuckers (Proctor & Gamble), and ConAgra (Hunt-Wesson).

We are the only soybean processing plant that currently operates in South Dakota. We believe that our processing facility represents approximately 7% of the total soybean processing capacity in the upper Midwest and about 1.3% in the U.S. We plan to maintain our competitive position in the market by producing high quality products and operating a highly efficient operation at the lowest possible cost, and adding value to our products. In March 2011 we completed construction of a soybean oil deodorizer. The deodorization unit allows us to further refine the soybean oil into a fully-refined salad oil. This gives us a greatly expanded customer base to which to market the oil, increasing our competitive position in the processing industry.

Government Regulation and Environmental Matters

Our business is subject to laws and related regulations and rules designed to protect the environment which are administered by the U.S. Environmental Protection Agency, the South Dakota Department of Environment and Natural Resources and similar government agencies. These laws, regulations and rules govern the discharge of materials to the environment, air and water; reporting storage of hazardous wastes; the transportation, handling and disposition of wastes; and the labeling of pesticides and similar substances. Our business is also subject to laws and related regulations and rules administered by other federal, state, local and foreign governmental agencies that govern the processing, storage, distribution, advertising, labeling, quality and safety of feed and grain products. Failure to comply with these laws, regulations and rules could subject us to administrative penalties, injunctive relief, civil remedies and possible recalls of products.

Available Information

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to the Securities Exchange Act of 1934, as amended, are filed with the SEC. Such reports and other information filed by us with the SEC are available on the SEC website (www.sec.gov). The public may read and copy any materials filed by us with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy, and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. The contents of these websites are not incorporated into this filing. Our website is at www.sdsbp.com .

Item 1A.     Risk Factors.

We are affected by changes in commodity prices.   Our revenues, earnings and cash flows are affected by market prices for commodities such as crude petroleum oil, natural gas, soybeans, and crude and refined vegetable oils. Commodity prices generally are affected by a wide range of factors beyond our control, including weather, disease, insect damage, drought, the availability and adequacy of supply, government regulation and policies, and general political and economic conditions. In addition, we are exposed to the risk of nonperformance by counterparties to contracts. Risk of nonperformance by counterparties includes the inability to perform because of a counterparty’s financial condition and also the risk that the counterparty will refuse to perform a contract during a period of price fluctuations where contract prices are significantly different than the current market prices.

  We are subject to global and regional economic downturns and risks relating to turmoil in global financial markets. The level of demand for our products is increasingly affected by regional and global demographic and macroeconomic conditions, including population growth rates and changes in standards of living. A significant downturn in global economic growth, or recessionary conditions in major geographic regions, may lead to reduced demand for agricultural commodities which could adversely affect our business and results of operations. Additionally, weak global economic conditions and turmoil in global financial markets, including constraints on the availability of credit, have in the past adversely affected, and may in the future continue to adversely affect, the financial condition and creditworthiness of some of our customers, suppliers and other counterparties which in turn may negatively impact our financial condition and results of operations.

 We could be affected by higher than anticipated operating costs, including but not limited to increased prices for soybeans. In addition to general market fluctuations and economic conditions, we could experience significant cost increases associated with the ongoing operation of our soybean processing and refining plant caused by a variety of factors, many of which are beyond our control. These cost increases could arise from an inadequate local supply of soybeans and resulting increased price that is not accompanied by an increase in the price for soybean oil and meal. Labor costs can also increase over time, particularly if there is any shortage of labor, or shortage of persons with the skills necessary to operate our facility. Adequacy and cost of electric and natural gas utilities could also affect our operating costs. Changes in price, operation and availability of truck and rail transportation may affect our profitability with respect to the transportation of soybean meal, oil and other products to our customers.

It may become more difficult to sell our soybean oil for human consumption. The U.S. Food and Drug Administration requires food manufacturers to disclose the levels of trans-fatty acids contained in their products. In addition, various local governments in the U.S. are considering, and some have enacted, restrictions on the use of trans-fats in restaurants. Several food processors have either switched or indicated an intention to switch to edible oil products with lower levels of trans-fatty acids. Because processing soybean oil, particularly hydrogenation, creates trans-fat, it may be difficult to sell our oil to customers engaged in the food industry which could adversely affect our revenues and profits.

Hedging transactions involve risks that could harm our profitability. To reduce our price change risks associated with holding fixed price commodity positions, we generally take opposite and offsetting positions by entering into commodity futures contracts (either a straight futures contract or an options futures contract) for soybeans, soybean meal and crude soybean oil on the Chicago Mercantile Exchange. While hedging activities reduce our risk of loss from changing market values, such activities also limit the gain potential which otherwise could result from those market fluctuations. Our policy is to maintain hedged positions within limits, but we can be long or short at any time. In addition, at any one time, our inventory and purchase contracts for delivery to the plant may be substantial, which could limit our ability to adjust our hedged positions. If our risk management policies and procedures that guide our net position limits are inadequate, we could suffer adverse financial consequences.

Our business is less diversified following the closing of USSC’s operations. After the closing of USSC’s operations in December 2011, we now produce and sell fewer products. Therefore, the success of our business rests solely on the soybean processing side of our operations. This lack of diversification may limit our ability to adapt to changing business conditions and could cause harm to our business.

We are dependent on our management and other key personnel, and loss of their services may adversely affect our business. Our success and business strategy is dependent in large part on our ability to attract and retain key management and operating personnel. This can present particular challenges for us because we operate in a specialized industry and because our business is located in a rural area. Such individuals are in high demand and are often subject to competing employment offers in the agricultural value-added industries. In particular, our success is dependent on our ability to retain the services of Mr. Kersting, our CEO and Mr. Hyde, our CFO. The loss of the services of Messrs. Hyde or Kersting or the failure of such individuals to perform their job functions in a satisfactory manner would have a material adverse effect on our business operations and prospects.

 We operate in an intensely competitive industry and we may not be able to continue to compete effectively. We may not be able to continue to successfully penetrate the markets for our products. The soybean processing business is highly competitive, and other companies presently in the market, or that could enter the market, could adversely affect prices for the products we sell. We compete with other soybean processors such as Archer-Daniels Midland (ADM), Cargill, Bunge, and Ag Processing (AGP), among others, all of which are capable of producing significantly greater quantities of soybean products than we do, and may achieve higher operating efficiencies and lower costs due to their scale.

Our profitability is influenced by the protein and moisture content of the soybeans in the local growing area. The northern portion of the western soybean belt, where our plant is located, typically produces a lower protein soybean resulting in a lower protein soybean meal. Because lower protein soybean meal is sold at a lower price, we may not be able to operate as profitably as soybean processing plants in other parts of the country. If adverse weather conditions further reduce the protein content of the soybeans grown in our area, our business may be materially harmed because we will be required to sell our soybean meal at discounted prices to our customers.

In addition, the moisture content of the soybeans that are delivered to our plant also influences our profitability and the efficiency of our plant operations. Soybeans with high moisture content require more energy to dry them before they can be processed. While we may recover some of these extra energy costs by paying producers less for high moisture soybeans, these savings may not be sufficient to offset our additional operating expenses.

Because soybean processing and refining is energy intensive, our business will be materially harmed if energy prices increase substantially. Electricity prices have steadily increased the last few years, and natural gas prices have fluctuated historically. Currently, natural gas prices are at record low levels. If the trend in electricity prices continues, any significant increase in the price of natural gas will increase our energy costs and adversely affect our profitability and operating results.

Transportation costs are a factor in the price of soybean oil and meal and increased transportation costs could adversely affect our profitability. Soybean oil may be shipped by trucks, rail cars, and barges. Added transportation costs are a significant factor in the price of soybean oil, and we may be more vulnerable to increases in transportation costs than other producers because our location in Volga is more remote than that of most of our competitors. Today, most of our products are sold FOB Volga, South Dakota, and those that are not have the full transportation cost added to the contract. Transportation costs do not currently affect our margin directly; however, the added costs could eventually affect demand for our products.

Increases in the production of soybean meal or oil could result in lower prices for soybean meal or oil and have other adverse effects. Existing soybean processing and refining plants could construct additions to increase their production and new soybean processing and refining plants could be constructed as well. If there is not a corresponding increase in the demand for soybean meal and oil or if the increased demand is not significant, the increased production of soybean meal and oil may lead to lower prices for soybean meal and oil. The increased production of soybean meal and oil could have other adverse effects as well. For example, the increased production of soybean meal and oil could result in increased demand for soybeans which could in turn lead to higher prices for soybeans, resulting in higher costs of production and lower profits if we are not able to lock in satisfactory margins on future soybean purchases and soybean meal and oil sales.

Legislative, legal or regulatory developments could adversely affect our profitability. We are subject to extensive air, water and other environmental laws and regulations at the federal and state level. In addition, some of these laws require our plant to operate under a number of environmental permits. These laws, regulations and permits can often require pollution control equipment or operational changes to limit actual or potential impacts to the environment. A violation of these laws and regulations or permit conditions can result in substantial fines, damages, criminal sanctions, permit revocations and/or plant shutdowns.

New environmental laws and regulations, including new regulations relating to alternative energy sources and the risk of global climate change, new interpretations of existing laws and regulations, increased governmental enforcement or other developments could require us to make additional unforeseen expenditures. It is expected that some form of regulation will be forthcoming at the federal level in the U.S. with respect to emissions of GHGs, (including carbon dioxide, methane and nitrous oxides). Also, new federal or state legislation or regulatory programs that restrict emissions of GHGs in areas where we conduct business could adversely affect our operations and demand for our products. New legislation or regulator programs could require substantial expenditures for the installation and operation of equipment that we do not currently possess or substantial modifications to existing equipment.

In addition, although our production of soybean meal and oil is not directly regulated by the U.S. Food & Drug Administration, we must comply with the FDA’s content and labeling requirements, which are monitored at our customers’ facilities. Failure to comply with these requirements could result in fines, liability to our customers or other consequences that could increase our operating costs and reduce profits. In addition, changes to the FDA’s rules or regulations could be adopted that would increase our operating costs and expenses, or require capital investment.

We are subject to industry-specific risks which could adversely affect our operating results. We are subject to risks which include, but are not limited to, product quality or contamination; shifting consumer preferences; federal, state, and local food processing regulations; socially unacceptable farming practices; environmental, health and safety regulations; and customer product liability claims.  The liability which could result from certain of these risks may not always be covered by, or could exceed liability insurance related to product liability and food safety matters maintained by us.  The occurrence of any of the matters described above could adversely affect our revenues and operating results. Our products are used as ingredients in livestock and poultry feed.  Thus, we are subject to risks associated with the outbreak of disease in livestock and poultry, including, but not limited to, mad-cow disease and avian influenza.  The outbreak of disease could adversely affect demand for our products used as ingredients in livestock and poultry feed.  A decrease in demand for these products could adversely affect our revenues and operating results.

We could face increased operating costs if we were required to segregate genetically modified soybeans and the products generated from these soybeans. In the last several years, some soybean producers in our area have been planting genetically modified soybeans, commonly known as Round-up Ready beans. Neither the U.S. Department of Agriculture nor the FDA currently requires that genetically modified soybeans be segregated from other soybeans. If these agencies or our customers were to require that we process these genetically modified soybeans separately, we would face increased storage and processing costs and our profitability could be harmed.

We conduct our operations principally at our facility in Volga, South Dakota. We own the land, consisting of 106 acres, on which all of the infrastructure and physical properties rest. Our facilities consist of a soybean processing plant, a soybean oil refinery and deodorizer, a quality control laboratory, and administrative and operations buildings.

All of our tangible property, real and personal, serves as collateral for our debt instruments with our primary lender, CoBank, ACB, of Greenwood Village, Colorado, which is described below under “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operation—Indebtedness.”

From time to time in the ordinary course of our business, we may be named as a defendant in legal proceedings related to various issues, including without limitation, workers’ compensation claims, tort claims, or contractual disputes. We carry insurance that provides protection against general commercial liability claims, claims against our directors, officers and employees, business interruption, automobile liability, and workers’ compensation claims. We are not currently involved in any material legal proceedings and are not aware of any potential claims.

Part II

As of March 1, 2012, the total number of capital units outstanding is 30,419,000, all of which is owned and held by 2,189 members.

 Trading Activity

Our capital units are not traded on an exchange or The NASDAQ Stock Market. Rather, our capital units are traded on a “qualified matching service” as defined by the publicly-traded partnership rules of the federal tax code. Under the qualified matching service, bids for capital units submitted by interested buyers and sellers are matched on the basis of rules and conditions set forth under the federal tax code and by us, all trades being subject to approval by our board of managers. Our qualified matching service is operated through Variable Investment Advisors, Inc., of Sioux Falls, South Dakota, a registered broker-dealer operating a registered alternative trading system with the SEC. The following table contains historical information by quarter for the past two years regarding the trading of capital units through the qualified matching service:

There were no issuer purchases of equity securities during the fourth quarter ending December 31, 2011.

Trading and Transfer Restrictions

As a limited liability company, we must strictly restrict transfers of our capital units in order to preserve our preferential single-level tax status at the member level. To preserve this, our operating agreement prohibits transfers other than through the procedures specified under our capital units transfer system, which may be amended from time to time by our board of managers. Under this system, our capital units cannot be traded on any national securities exchange or in any over-the-counter market. Also, we do not permit the number of capital units traded through the qualified matching service on an annual basis to exceed 10% of our total issued and outstanding capital units. All transactions also must be approved by the board, which are generally approved if they fall within “safe harbors” contained in the rules of the federal tax code. Permitted transfers include transfers by gift or death, sales to qualified family members, and trades through the qualified matching service subject to the 10% restriction. Pursuant to our operating agreement, a minimum of 2,500 capital units is required to be owned by an individual for membership, and no member may own more than 1.5% of our total outstanding capital units.

Distributions

In 2011 and 2010, we made no cash distributions to our members.  Our distributions are declared at the discretion of our board of managers and are issued in accordance with the terms of our operating agreement. In addition, distributions are subject to restrictions imposed under our loan agreement with our lender. There is no assurance as to if, when, or how much we will make in distributions in the future. Actual distributions depend upon our profitability, expenses and other factors discussed in this report.

The following table sets forth selected financial data of South Dakota Soybean Processors, LLC for the periods indicated. The financial statements for the years ended December 31, 2011, 2010 and 2009 included in Item 8 of this report were audited by Eide Bailly LLP.

You should read the following discussion along with our financial statements and the notes to our financial statements included elsewhere in this report. The following discussion contains forward-looking statements that are subject to risks, uncertainties and assumptions. Our actual results, performance and achievements may differ materially from those expressed in, or implied by, such forward-looking statements. See “Cautionary Statement Regarding Forward-Looking Information” at the beginning of this report.

Overview and Executive Summary

Our core business and primary source of income generation is our soybean processing plant located in Volga, South Dakota. We process approximately 27 million bushels of soybeans annually to produce approximately 600,000 tons of high protein soybean meal and 300 million pounds of crude soybean oil. Our production represents approximately 1.3% of the total soybean processing capacity in the U.S. In addition to our processing plant, we operate a soybean oil refinery in Volga where we refine the crude soybean oil for customers in the food, chemical and industrial sectors. In the second quarter of 2011, we completed construction of a deodorizer to our refinery, which allows us to produce and sell food-grade soybean oil and opens a new customer base for our products. Also, under certain market conditions we may issue warehouse receipts for crude soybean oil according to the terms and conditions of a Chicago Mercantile Exchange Group (CME) soybean oil contract.

Soybean processing is basically a commodity driven business and is cyclical in nature. Our industry is dependent on the annual soybean crop production (supply side) and world economic growth (demand side for food). Soybean processing is a highly consolidated industry with four companies in the U.S. controlling approximately 84% of the soybean processing industry and approximately 75% of the soybean oil refining capacity for food applications. We compete in this industry by producing high quality products and operating a highly efficient operation at the lowest possible cost.

In addition to soybean processing, we operated in the polyurethane industry through our wholly-owned subsidiary, Urethane Soy Systems Company (USSC), until its operations were closed in December 2011 because of poor financial performance. USSC was engaged in the business of researching, marketing and developing soy-based polyol and soy-based polyurethane systems. Finished products included a spray-on insulation product called SoyTherm^®, an elastomeric coating material for several different applications (such as bedliners) called BioTuff™, and several others sold to original equipment manufacturers (OEM).

During the year ended December 31, 2011, we recorded a consolidated net loss of approximately $3.9 million. This loss consists of a $0.3 million loss from our soy processing segment and $3.6 million loss from our polyurethane segment. The loss from our polyurethane segment is primarily due to a $2.2 million impairment of the assets associated with this segment. Within our soy processing segment, the net loss is primarily attributable to a poor domestic demand for soybean meal. The poultry industry, which is the primary user of soybean meal in the U.S., is in the process of a reorganization as it struggles with tough margins. While the hog industry appears to be stable, it has been unable to offset the slowdown in demand from the poultry side.

There are traces of optimism, however. Soybean meal exports remain below last year’s levels but are showing signs of improvement. In addition, the recent break in soybean meal prices has made soybean meal regain a competitive advantage in certain rations, allowing it to recapture a share of the feed market from distillers grains.

In terms of the soybean processing industry as a whole, capacity utilization remains very low as a result of the poor domestic demand for soybean meal. Last month, USDA lowered its soybean crushing projection totals from 1.635 billion to 1.625 billion bushels. Further reductions are expected in future reports. Those numbers are telling, especially when you consider that just a few years ago processing was more than 1.8 billion bushels.

The news on soybean oil demand continues to be promising. While oil demand will likely be lower in the first quarter of 2012, due to seasonal shutdowns within the biodiesel industry, the expectation for the balance of the year is strong. USDA is forecasting 3.6 billion pounds of soybean oil moving into the biodiesel industry in 2012 compared to 2.55 billion in 2011.

Results of Operations

Comparison of Years Ended December 31, 2011 and 2010

Revenue – Revenue increased $112.0 million, or 39.3%, for the year ending December 31, 2011, compared to 2010. The increase in revenues is primarily due to an increase in the average sales price of soybean meal and oil and increased volume of soybean oil sales. Despite a reduction in demand for soybean meal, the average sales price of our soybean meal and oil increased approximately 9% and 51%, respectively, in 2011, compared to 2010. These increases are primarily attributable to a weak U.S. dollar, which caused substantial price increases in nearly all commodities including soybean meal and oil. The increase in sales prices and volume of soybean oil sales also occurred because of an improvement in oil basis levels, largely resulting from a rebound in the biodiesel market.

Gross Profit/Loss – We generated a gross profit of $0.5 million in 2011, compared to a gross profit of $3.1 million in 2010. The $2.6 million decrease in gross profit is primarily attributed to lower customer demand for soybean meal. Canola meal and distiller grains are continuing to sell at a far lower price than normal and are experiencing an increase in demand from feeders, which has consequently caused a decrease in the demand for soybean meal.

Operating Expenses – Consolidated administrative expenses, including all selling, general and administrative expenses, decreased $313,000, or 11.9%, for the year ended December 31, 2011, compared to the same period in 2010. The decrease is largely due to a reduction in personnel costs and professional fees. The decrease in personnel costs is primarily due to the resignation of our former chief executive officer on March 28, 2011. Our new chief executive officer, Tom Kersting, who served previously as our commercial manager and has been employed with us since 1996, immediately assumed duties as chief executive officer, but has not entered into any new compensatory plan as a result of his additional responsibilities. The decrease in professional fees in 2011 is largely due to a decrease in legal fees stemming from the completion of a legal matter in the first quarter of 2010.

Interest Expense – Interest expense increased to $1.3 million during 2011, compared to $1.2 million in 2010. This increase is due to increased debt levels resulting from our refinery expansion project. The average debt level during the year ended December 31, 2011 is approximately $33.4 million, compared to an average debt level of $30.0 million for the same period in 2010.

Other Non-Operating Income – Other non-operating income increased to $2.7 million in 2011, compared to $2.6 million in 2010. The increase is primarily due to an increase in patronage allocations received from our interest in CoBank.

Loss from Discontinued Operations – In 2011, we decided to discontinue operations of our polyurethane segment, including our wholly-owned subsidiary USSC, and place USSC’s assets and business as available for sale. This decision was made primarily because of a history of significant operating losses. During the year ended December 31, 2011, we generated within this segment a loss of $3.6 million, compared to $2.3 million during the same period in 2010. The increase is primarily due to a $2.2 million impairment of the assets associated with the discontinuance of this segment, offset by a $1.3 million decrease in operating expenses resulting from the discontinuance of this segment.

Net Income/Loss – We generated a consolidated net loss of $3.9 million during 2011, compared to $0.5 million in 2010. The $3.4 million increase in net loss is primarily attributable to a reduction in customer demand for soybean meal, which minimized our crush margins, and a $2.2 million impairment on assets associated with the discontinuance of the polyurethane segment.

Comparison of Years Ended December 31, 2010 and 2009

Revenue – Revenues increased $21.7 million, or 8.2%, for the year ended December 31, 2010, compared to 2009.    The increase is primarily due to an increase in the sales volumes of soybean oil, along with an increase in the average sales price of soybean oil.  Because the volume of bushels processed increased 3.0% in the year ended December 31, 2010, compared to the same period in 2009, the amount of product available to sell also increased.  In addition, soybeans harvested locally in the fall of 2009 (crushed by our plant primarily during first 9 months of 2010) had higher oil content than the soybeans crushed during most of 2009, which increased the amount of soybean oil produced from a bushel of soybeans in 2010.  As for prices, the average sales price of our soybean oil increased approximately 18% in 2010, compared to 2009.  The principal cause for the price improvement is a record export in sales of soybeans to China and strong international demand for soybean products.

Gross Profit/Loss – For the year ended December 31, 2010, we generated a gross profit of $3.1 million compared to $1.8 million in 2009, an increase of $1.3 million.  The increase in gross profit is primarily attributed to an improved demand internationally for soybean products, resulting largely from a weak U.S. dollar.  Partially offsetting this increase is the adverse impact of higher moisture content in the soybeans delivered to our facility during the first nine months of 2010. Higher moisture content decreases the amount of soybean meal produced from a bushel of soybeans.

Operating Expense – Operating expenses, including all selling, general and administrative expenses, decreased $0.6 million, or 18%, for the year ended December 31, 2010, compared to 2009.   This decrease was primarily caused by reductions in professional fees and bad debt expense in 2010, compared to 2009. The decrease in professional fees in 2010 was largely due to a decrease in legal fees stemming from a matter in which a settlement was entered in 2009.

Interest Expense – Interest expense increased by $315,000, or 35%, from 2009 to 2010. This increase is due to increased debt levels resulting from an increase in inventory quantity in 2010.  The average debt level in 2010 was approximately $30.0 million, compared to an average debt level of approximately $21.5 million for the same period in 2009.  Additionally, the increase in interest expense is due to an increase in interest rates on our senior debt.  The interest rate on our revolving long-term debt was 4.37% and 3.49% as of December 31, 2010 and 2009, respectively.

Other Non-Operating Income – Other non-operating income remained relatively constant for the year ended December 31, 2010, compared to the year ended December 31, 2009.

Loss from Discontinued Operations – During the year ended December 31, 2010, we generated a loss of $2.3 million from discontinued operations of our polyurethane segment, compared to loss of $7.2 million during the same period in 2009. The decrease is primarily due to a $4.5 million impairment of our patents in the polyurethane segment in 2009 as well as a decrease in amortization expense on those patents in 2010 compared to 2009.

Net Income/Loss – Our net loss decreased to $0.5 million in 2010 from $6.7 million in 2009, an improvement of $6.2 million.  The improvement is primarily attributable to the $4.5 million patent impairment charge in 2009, an increase in gross profit, and decrease in administrative expenses.  Partially offsetting this improvement in net income is an increase in interest expenses during 2010, compared to 2009.

Liquidity and Capital Resources

Our primary sources of liquidity are cash provided by operations and borrowings under our two lines of credit which are discussed below under “Indebtedness.” On December 31, 2011, we had working capital, defined as current assets less current liabilities, of approximately $6.7 million, compared to working capital of $11.3 million on December 31, 2010. Working capital decreased between periods primarily due to a net loss. Based on our current operating plans, we believe that we will be able to fund our needs for the foreseeable future from cash from operations and revolving lines of credit.

Comparison of the years ended December 31, 2011 and 2010

Cash Flows From (Used For) Operating Activities

Cash flows from (used for) operating activities are generally affected by commodity prices and the seasonality of our business. These commodity prices are affected by a wide range of factors beyond our control, including weather, crop conditions, drought, the availability and the adequacy of supply and transportation, government regulations and policies, world events, and general political and economic conditions.  The $29.4 million change in cash flows from (used for) operating activities from 2010 to 2011 is primarily attributed to a decrease in inventory and an increase in accrued commodity purchases in 2011, compared to 2010.  During 2011, we decreased inventories by $16.4 million, compared to a $6.8 million increase in 2010.  We also increased accrued commodity purchases by $13.3 million during 2011, compared to $4.8 million in 2010.

 Cash Flows from Investing Activity

 The $3.0 million decrease in cash flows used for investing activities is principally due to a decrease in the purchase of property and equipment in 2011. Property and equipment purchases were $3.1 million in 2011, compared to $5.6 million during 2010. In 2010, we began construction of a deodorizer to our refinery which has allowed us to produce and sell food-grade soybean oil. During the year ended December 31, 2011, we spent approximately $2.0 million on the deodorizer project, compared to $4.9 million during the same period in 2010.

Cash Flows from Financing Activity

The $32.4 million change in cash flows from (used for) financing activities is principally due to a decrease in short-term borrowings as a result of a decrease in inventory and increase in accrued commodity purchases during 2011, compared to 2010.

Comparison of the years ended December 31, 2010 and 2009

Cash Flows From (Used For) Operating Activities

Cash flows from (used for) operating activities are generally affected by commodity prices and the seasonality of our business. These commodity prices are affected by a wide range of factors beyond our control, including weather, crop conditions, drought, the availability and the adequacy of supply and transportation, government regulations and policies, world events, and general political and economic conditions.  The $10.8 million decrease in cash flows used for operating activities from 2009 to 2010 is primarily attributed to a decrease in net loss and a large fluctuation in inventory in 2010, compared to 2009.  During 2010, we increased inventories by $6.8 million, compared to $13.2 million in 2009.  In addition, the decrease in cash flows used for operating activities is due to an increase of $4.9 million in accrued commodity purchases in 2010, compared to a $2.2 million decrease in 2009.

Cash Flows from Investing Activity

The $4.6 million increase in cash used for investing activities from 2009 to 2010 is primarily attributed to an increase in the amount of purchases of property and equipment.  Property and equipment purchases were $5.9 million in 2010, compared to $1.6 million in 2009.  In 2010, we began construction on a refinery expansion project by building a deodorizer which will allow us to produce food-grade oil.  Total expenditures on this project were approximately $4.9 million in 2010.

Cash Flows from Financing Activity

The $6.2 million decrease in cash flows from financing activities from 2009 to 2010 is principally due to a decrease in borrowings during 2010, compared to 2009.  During the year ended December 31, 2010, our borrowings increased by $11.0 million, compared to a $17.2 million increase during the same period in 2009.  This change is largely due to fluctuations in inventories, accounts receivable and accrued commodity purchases caused by the large fluctuations in commodity prices over the last few years.

Indebtedness

We have two lines of credit with CoBank, our primary lender, to meet the short and long-term needs of our operations. The first credit line is a revolving long-term loan. Under the terms of this loan, we may borrow funds as needed up to the credit line maximum, or $16.8 million, and then pay down the principal whenever excess cash is available. Repaid amounts may be borrowed up to the available credit line. The available credit line is scheduled to be reduced by $1.3 million every six months starting September 20, 2012 until maturity on March 20, 2018. The final payment at maturity is equal to the remaining unpaid principal balance of the loan. We pay a 0.50% annual commitment fee on any funds not borrowed. The principal balance outstanding on the revolving term loan is $14.8 million and $13.9 million as of December 31, 2011 and 2010, respectively. Under this loan, we have an additional $695,800 in available funds to borrow as of December 31, 2011.

The second credit line is a revolving working capital (seasonal) loan that, prior to the amendment discussed below, matures on June 1, 2012. The primary purpose of this loan is to finance inventory and receivables. The maximum available under this credit line is $40 million. Borrowing base reports and financial statements are required monthly to justify the balance borrowed on this line. We pay a 0.25% annual commitment fee on any funds not borrowed; however, we have the option to reduce the credit line during any given commitment period listed in the agreement to avoid the commitment fee. The principal balance on the working capital loan is $0 and approximately $24.8 million as of December 31, 2011 and 2010, respectively. Under this loan, we have an additional $40 million in available funds to borrow as of December 31, 2011.

Both CoBank loans are set up with a variable rate option. The variable rate is set by CoBank and changes weekly on the first business day of each week. We also have a fixed rate option on both loans allowing us to fix rates for any period between one day and the entire commitment period. The annual interest rate on the revolving term loan is 4.55% and 4.37% as of December 31, 2011 and 2010, respectively. As of December 31, 2011 and 2010, the interest rate on the working capital loan is 4.30% and 4.12%, respectively.

Both CoBank loans are secured by substantially all of our assets and are subject to compliance with standard financial covenants and the maintenance of certain financial ratios. We were in violation of one of our loan covenants with CoBank as of December 31, 2011. Prior to the loan amendment discussed below, the loan covenant required us to maintain a minimum working capital of $8.0 million at fiscal year-end (December 31^st) and $6.5 million at the end of each other period (monthly) for which financials are furnished. At December 31, 2011, working capital computed per the loan agreement with CoBank was approximately $6.7 million. CoBank granted a waiver of this covenant violation on March 12, 2012. On March 14, 2012, we entered into an amendment of our loan agreements with CoBank. Under the amendment, CoBank decreased the minimum working capital requirement for each period, other than our fiscal year-end, to $5.5 million. In addition, CoBank agreed to extend the maturity date on our seasonal loan to August 1, 2012 from June 1, 2012.

We also had another note payable totaling $250,000, with an annual interest rate of 5.0%. The principal balance on this note is $0 and $238,000 as of December 31, 2011 and 2010, respectively. We made principal payments totaling $238,000 and $12,000 on this obligation during the year ended December 31, 2011 and 2010, respectively.

Capital Expenditures

We invested approximately $3.1 million in capital expenditures for property and equipment during the year ended December 31, 2011, compared to approximately $5.6 million in capital expenditures during the year ended December 31, 2010.  In 2010, we began construction on a refinery expansion project by building a deodorizer allowing us to produce food-grade oil.  Total expenditures on this project in 2011 were approximately $2.0 million, compared to $4.9 million in 2010. Depending on our profitability in 2012, we anticipate spending between $1.0 million and $2.0 million on capital expenditures in 2012 to enhance the quality and efficiency of our soybean crushing facility.  Our principal sources of funds are anticipated to be cash flows from operating activities.

Off Balance Sheet Financing Arrangements

Except as described below, we do not utilize variable interest entities or other off-balance sheet financial arrangements.

Lease Commitments

We have commitments under various operating leases for rail cars, various types of vehicles, and lab and office equipment.  Our most significant lease commitments are the rail car leases we use to distribute our products.  We have a number of long-term leases with GE Capital, Trinity Capital, Flagship Rail Services and GATX Corporation for hopper rail cars and oil tank cars. Total lease expenses under these arrangements are approximately $2.2 million and $2.1 million for the years ended December 31, 2011 and 2010, respectively. The hopper rail cars earn mileage credit from the railroad through a sublease program, which totaled $1.5 million for each of the years ended December 31, 2011 and 2010.

In addition to rail car leases, we have several operating leases for various equipment and storage facilities. Total lease expense under these arrangements is $202,000 and $275,000 for the years ended December 31, 2011 and 2010, respectively. Some of our leases include purchase options, none of which, however, are for a value less than fair market value at the end of the lease.

Other Long-Term Commitments

We have a commitment under a Grain Storage and Transportation Agreement with H&I Grain of Heartland, Inc. (H&I). This agreement is for the handling, storage and transportation of soybean to and from the H&I facilities located in DeSmet, Hetland, and Arlington, South Dakota at established rates per bushel. The agreement provides for an annual minimum payment of $200,000. The agreement expires on August 31, 2014. Expenses under this agreement were $642,000 and $681,000 for the years ended December 31, 2011 and 2010, respectively.

Contractual Obligations

The following table shows our contractual obligations for the periods presented:

(1) Represents principal payments under our notes payable, which are included on our Consolidated Balance Sheet.

(2) Represents obligations under our deferred compensation program, which are included on our Consolidated Balance Sheet, and under our Grain Storage and Transportation Agreement with H & I.

Recent Accounting Pronouncements

See page F-11, Note 1 of our audited financial statements for a discussion on the impact, if any, of the recently pronounced accounting standards.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

Of the significant accounting policies described in the notes to the financial statements, we believe that the following may involve a higher degree of estimates, judgments, and complexity:

Commitments and Contingencies

Contingencies, by their nature relate to uncertainties that require management to exercise judgment both in assessing the likelihood that a liability has been incurred, as well as in estimating the amount of the potential expense.  In conformity with accounting principles generally accepted in the U.S., we accrue an expense when it is probable that a liability has been incurred and the amount can be reasonably estimated.

Inventory Valuation

We account for our inventories at estimated market value. These inventories are agricultural commodities that are freely traded, have quoted market prices, may be sold without significant further processing, and have predictable and insignificant costs of disposal. We derive our estimates from local market prices determined by grain terminals in our area. Processed product price estimates are determined by the ending sales contract price as of the close of the final day of the period. This price is determined by the average closing price on the Chicago Mercantile Exchange, net of the local basis, for the last three business days of the period and the first two business days of the subsequent period. Changes in the market values of these inventories are recognized as a component of cost of goods sold.

Long-Lived Assets

Depreciation and amortization of our property, plant and equipment is provided on the straight-lined method by charges to operations at rates based upon the expected useful lives of individual or groups of assets. Economic circumstances or other factors may cause management’s estimates of expected useful lives to differ from actual.

Long-lived assets, including property, plant and equipment and investments are evaluated for impairment on the basis of undiscounted cash flows whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impaired asset is written down to its estimated fair market value based on the best information available. Considerable management judgment is necessary to estimate undiscounted future cash flows and may differ from actual.

We evaluate the recoverability of identifiable intangible assets whenever events or changes in circumstances indicate that an intangible asset’s carrying value may not be recoverable. Such circumstances could include, but are not limited to: (1) a significant decrease in the market value of an asset, (2) a significant adverse change in the extent or manner in which an asset is used, or (3) an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset. We measure the carrying amount of the asset against the estimated undiscounted future cash flows associated with it. Should the sum of the expected future net cash flows be less than the carrying value of the asset being evaluated, an impairment loss is recognized.

The impairment loss is calculated as the amount by which the carrying value of the asset exceeded its fair value. The fair value is measured based on quoted market prices, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including the discounted value of estimated future cash flows. The evaluation of asset impairment requires us to make assumptions about future cash flows over the life of the asset being evaluated. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts.

Accounting for Derivative Instruments and Hedging Activities

We minimize the effects of changes in the price of agricultural commodities by using exchange-traded futures and options contracts to minimize our net positions in these inventories and contracts. We account for changes in market value on exchange-traded futures and option contracts at exchange prices and account for the changes in value of forward purchase and sales contracts at local market prices determined by grain terminals in the area. Changes in the market value of all these contracts are recognized in earnings as a component of cost of goods sold.

Item 7A.     Quantitative and Qualitative Disclosure about Market Risk.

Commodities Risk & Risk Management. To reduce the price change risks associated with holding fixed price commodity positions, we generally take opposite and offsetting positions by entering into commodity futures contracts (either a straight or options futures contract) on a regulated commodity futures exchange, the Chicago Mercantile Exchange. While hedging activities reduce the risk of loss from changing market prices, such activities also limit the gain potential which otherwise could result from these significant fluctuations in market prices. Our policy is generally to maintain a hedged position within limits, but we can be long or short at any time. Our profitability is primarily derived from margins on soybeans 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 cash contract.

At any one time, our inventory and purchase contracts for delivery to our facility may be substantial. We have risk management policies and procedures that include net position limits. They are defined by commodity, and include both trader and management limits. This policy and procedure triggers a review by management when any trader is outside of position limits. The position limits are reviewed at least annually with the board of managers. We monitor current market conditions and may expand or reduce the limits in response to changes in those conditions.

Foreign Currency Risk. We conduct essentially all of our business in U.S. dollars and have no direct risk regarding foreign currency fluctuations. Foreign currency fluctuations do, however, impact the ability of foreign buyers to purchase U.S. agricultural products and the competitiveness of and demand for U.S. agricultural products compared to the same products offered by foreign suppliers.

Interest Rate Risk. We manage exposure to interest rate changes by using variable rate loan agreements with fixed rate options. Long-term loan agreements can utilize the fixed option through maturity; however, the revolving ability to pay down and borrow back would be eliminated once the funds were fixed.

Item 8.        Financial Statements and Supplementary Data.

Reference is made to the “Index to Financial Statements” of South Dakota Soybean Processors, LLC located on the page immediately preceding page F-1 of this report, and financial statements and schedules for the years ended December 31, 2011, 2010 and 2009.

Item 9.       Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A.     Controls and Procedures.

Evaluation of Disclosure Controls and Procedures .   Our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report. Based on this evaluation, our management has concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.  Additionally, based on management’s evaluation, our disclosure controls and procedures were effective in ensuring that information required to be disclosed in our Exchange Act reports is accumulated and communicated to our management to allow timely decisions regarding required disclosures.

Management’s report on internal control over financial reporting.   Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934.  Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use, or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As a result of the audit of our financial statements, we determined that we had been inaccurately recording the timing of product sales sold with contract terms of ‘FOB Destination’. Contracts with terms of FOB Destination should have been recorded upon the arrival of the product at the agreed-upon destination. We, however, had been recording all sales upon shipment of the product, regardless of the contract terms. As a result of our evaluation of this error, we concluded that this error was material to the consolidated balance sheets and statements of operations for the years ended December 31, 2010 and 2009. Consequently, the consolidated financial statements for those periods were adjusted to reflect the correction of this error and additional internal controls have been implemented to prevent such error from occurring in the future. As of December 31, 2011, management assessed our internal control over financial reporting in relation to criteria described in Internal Control- Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment using those criteria, we concluded that, as of December 31, 2011, our internal control over financial reporting is not effective. Our management reviewed the results of their assessment with the Finance/Audit Committee.

This Annual Report does not include a report of our registered public accounting firm regarding internal control over financial reporting.  Our internal control over financial reporting was not subject to an audit report by our registered public accounting firm pursuant to the rules of the Commission that permit us to provide only management’s report in this report.

Changes in Internal Control over Financial Reporting.   There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.     Other Information.

None.

PART III

Pursuant to General Instructions G(3), we omit Part III, Items 10, 11, 12, 13, and 14, and incorporate such items by reference to an amendment to this Annual Report on Form 10-K or to an Information Statement to be filed with the Commission within 120 days after the close of the fiscal year covered by this Report (December 31, 2011).

Part IV

Item 15.      Exhibits, Financial Statement Schedules.

The following exhibits and financial statements are filed as part of, or are incorporated by reference into, this report:

(a)(1)       Financial Statements — Reference is made to the “Index to Financial Statements” of South Dakota Soybean Processors, LLC located on the page immediately preceding page F-1 of this report for a list of the financial statements for the year ended December 31, 2011.  The financial statements appear on page F-2 of this Report.

(2)           All supplemental schedules are omitted because of the absence of conditions under which they are required or because the information is shown in the Consolidated Financial Statements or notes thereto.

(3)           Exhibits - See Exhibit Index following the Signature Page to this report. The following exhibits constitute management agreements, compensatory plans, or arrangements: Exhibits 10.7, 10.8, 10.9, and 10.10.

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:

Pursuant to the requirements of the Securities Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

EXHIBIT INDEX**

** Documents can be found at www.sec.gov

South Dakota Soybean Processors, LLC

Consolidated Financial Statements

December 31, 2011, 2010, and 2009

SOUTH DAKOTA SOYBEAN PROCESSORS, LLC

Index to Financial Statements

Page

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Managers and Members

South Dakota Soybean Processors, LLC

Volga, South Dakota

We have audited the accompanying consolidated balance sheets of South Dakota Soybean Processors, LLC (the “Company”) as of December 31, 2011 and 2010, and the related consolidated statements of operations, changes in members’ equity, and cash flows for the years ended December 31, 2011, 2010, and 2009. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, 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, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of South Dakota Soybean Processors, LLC as of December 31, 2011 and 2010 and the consolidated results of its operations and its cash flows for the years ended December 31, 2011, 2010, and 2009, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the financial statements, cut off errors related to product shipment resulted in certain errors to various current assets, current liabilities, revenue and expense accounts for years ended December 31, 2010 and 2009. These errors were discovered by the Company’s management during the current year. Accordingly, the 2010 and 2009 financial statements have been restated to correct these errors.

 /s/ Eide Bailly LLP

Greenwood Village, Colorado

March 30, 2012

South Dakota Soybean Processors, LLC

Consolidated Balance Sheets

December 31, 2011 and 2010

The accompanying notes are an integral part of these consolidated financial statements.

South Dakota Soybean Processors, LLC

Consolidated Balance Sheets (continued)

December 31, 2011 and 2010

The accompanying notes are an integral part of these consolidated financial statements. 

South Dakota Soybean Processors, LLC

Consolidated Statements of Operations

For the Years Ended December 31, 2011, 2010, and 2009

The accompanying notes are an integral part of these consolidated financial statements. 

South Dakota Soybean Processors, LLC

Consolidated Statement of Changes in Members’ Equity

For the Years Ended December 31, 2011, 2010, and 2009

The accompanying notes are an integral part of these consolidated financial statements. 

South Dakota Soybean Processors, LLC

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2011, 2010, and 2009

The accompanying notes are an integral part of these consolidated financial statements. 

South Dakota Soybean Processors, LLC

Consolidated Statements of Cash Flows (continued)

For the Years Ended December 31, 2011, 2010, and 2009

The accompanying notes are an integral part of these consolidated financial statements. 

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South Dakota Soybean Processors, LLC

Notes to Consolidated Financial Statements

Note 1 -           Principal Activity and Significant Accounting Policies

Organization

South Dakota Soybean Processors, LLC (the “Company” or “LLC”) processes and sells soybean products, such as soybean oil, meal and hulls. The Company’s principal operations are in Volga, South Dakota.

The Company holds a 100% equity interest in Urethane Soy Systems Company (“USSC”), which is responsible for marketing, formulation and technical support of Soyol^® (a polyol made from soybean oil) and related systems. The Company consolidates the operations of USSC.

During 2011 the Company determined to discontinue operations of its polyurethane segment, including its wholly-owned subsidiary USSC, and put the assets and business up for sale. For all periods presented, amounts associated with the polyurethane segment have been classified as discontinued operations on the accompanying consolidated financial statements. See Note 5 for additional information.

Principles of consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All significant intercompany accounts and transactions have been eliminated.

Cash and cash equivalents

The Company considers all highly liquid investment instruments with maturities of three months or less at the time of acquisition to be cash equivalents.

Accounts receivable

Accounts receivable are considered past due when payments are not received on a timely basis in accordance with the Company’s credit terms, which is generally 30 days from invoice date. Accounts considered uncollectible are written off. The Company’s estimate of the allowance for doubtful accounts is based on historical experience, its evaluation of the current status of receivables, and unusual circumstances, if any.

The following table provides information regarding the Company’s allowance for doubtful accounts receivable of continued operations as of December 31, 2011, 2010, and 2009:

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South Dakota Soybean Processors, LLC

Notes to Consolidated Financial Statements

In general cash received is applied to the oldest outstanding invoice first, unless payment is for a specified invoice. The Company, on a case by case basis, may charge a late fee of 1 ½% per month on past due receivables.

Inventories

Finished goods (soybean meal, oil, refined oil, and hulls) and raw materials (soybeans) are valued at estimated market value. This accounting policy is in accordance with the guidelines described in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 905, Agriculture (formerly AICPA Statement of Position No. 85-3, Accounting by Agricultural Producers and Agricultural Cooperatives). Supplies and other inventories are stated at the lower of cost, determined by the first-in, first-out method, or market.

Investments

Investments in cooperatives are carried at cost plus the amount of patronage earnings allocated to the Company, less any cash distributions received.

Property and equipment

Property and equipment is stated at cost. Expenditures for renewals and improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. Expenditures for maintenance and repairs are charged to expense when incurred. When depreciable properties are sold or retired, the cost and accumulated depreciation are eliminated from the accounts and the resultant gain or loss is reflected in income.

Depreciation is provided for over the estimated useful lives of the individual assets using the straight-line method. The range of the estimated useful lives used in the computation of depreciation is as follows:

The Company reviews its long-lived assets for impairment whenever events indicate that the carrying amount of the asset may not be recoverable. If impairment indicators are present and the future cash flows is less than the carrying amount of the assets, values are reduced to the estimated fair value of those assets.

Patents

The Company’s patents are amortized over their estimated useful lives, using the straight-line method over a period of 16 to 20 years, which is the shorter of the remaining estimated economic life of the patents acquired or 20 years from the original file date.

The Company evaluates the recoverability of identifiable intangible assets whenever events or changes in circumstances indicate that an intangible asset’s carrying value may not be recoverable. Such circumstances could include, but are not limited to (1) a significant decrease in the market value of an asset, (2) a significant adverse change in the extent or manner in which the asset is used, or (3) an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset. The Company measures the carrying amount of the asset against the estimated undiscounted future cash flows associated with it. Should the sum of the expected future net cash flows be less than the carrying value of the asset being evaluated, an impairment loss would be recognized. The impairment loss would be calculated as the amount by which the carrying value of the asset exceeds its fair value. The fair value is measured based on quoted market prices, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including the discounted value of estimated future cash flows. The evaluation of asset impairment requires the Company to make assumptions about future cash flows over the life of the assets being evaluated. These assumptions require significant judgment and actual results may differ from assumed and estimated amounts. During the years ended December 31, 2011, 2010, and 2009, the Company recorded impairment losses of $383,268, $0, and $4,507,289, respectively, related to intangible assets.

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South Dakota Soybean Processors, LLC

Notes to Consolidated Financial Statements

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 amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition

Revenue is recognized when the title to the related products is transferred to the customer. When a sales contract has delivery terms of ‘FOB Shipping Point’, revenue is recognized when the products are shipped. For those sales contracts with delivery terms of ‘FOB Destination’, revenue is not recognized until the products are delivered to the agreed-upon location. Revenues are presented net of discounts and sales allowances.

Freight

The Company presents all amounts billed to the customer for freight as a component of net revenue. Costs incurred for freight are reported as a component of cost of revenue.

The Company’s “Shipping and Handling Costs” policy is in accordance with ASC 605, Revenue Recognition (formerly EITF Issue 00-10, Accounting for Shipping and Handling Fees and Costs).

Advertising costs

Advertising and promotion costs are expensed as incurred. The Company incurred $25,000, $24,000, and $21,000 of advertising costs on continuing operations in the years ended December 31, 2011, 2010, and 2009, respectively.

Environmental remediation

It is management’s opinion that the amount of any potential environmental remediation costs will not be material to the Company’s financial condition, results of operations, or cash flows; therefore, no accrual has been recorded.

Accounting for derivative instruments and hedging activities

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South Dakota Soybean Processors, LLC

Notes to Consolidated Financial Statements

All of the Company’s derivatives are designated as non-hedge derivatives. The futures and options contracts used by the Company are discussed below. Although the contracts may be effective economic hedges of specified risks, they are not designated as, nor accounted for, as hedging instruments.

The Company, as part of its trading activity, uses futures and option contracts offered through regulated commodity exchanges to reduce risk. The Company is exposed to risk of loss in the market value of inventories. To reduce that risk, the Company generally takes opposite and offsetting positions using futures contracts or options.

Unrealized gains and losses on futures and options contracts used to hedge soybean, oil and meal inventories are recognized as a component of net proceeds for financial reporting. Inventories are recorded at estimated market value. Consequently, unrealized gains and losses on derivative contracts are offset by unrealized gains and losses on inventories and reflected in current earnings.

Earnings per capital unit

Earnings per capital unit are calculated based on the weighted average number of capital units outstanding. The Company has no other capital units or other member equity instruments that are dilutive for purposes of calculating earnings per capital unit.

Income taxes

As a limited liability company, the Company’s taxable income or loss is allocated to members in accordance with their respective percentage ownership. Therefore, no provision or liability for income taxes has been included in the financial statements.

The Company has evaluated the provisions of FASB ASC 740-10 (previously Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes) for uncertain tax positions. As of December 31, 2011 and 2010, the unrecognized tax benefit accrual was zero.

The Company will recognize future accrued interest and penalties related to unrecognized tax benefits in income tax expense if incurred.

As of December 31, 2011, the tax basis of the Company’s net assets exceeds the book value of those assets by approximately $9.2 million.

The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions.  We are no longer subject to income tax examinations by U.S. federal and state tax authorities for years prior to 2008.  We currently have no tax years under examination.

Recent accounting pronouncements

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not expect the future adoption of any such pronouncements to have a material impact on the Company’s financial condition or results of operations.

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South Dakota Soybean Processors, LLC

Notes to Consolidated Financial Statements

Note 2 -              Correction of Prior Period

In accordance with the SEC’s Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements” (SAB 108), in 2009 and 2010 the Company recorded all product sales upon shipment of the product regardless of the contract terms. Those contracts with terms of ‘FOB Destination’ should have been recorded upon the arrival of the product at the agreed-upon location. As a result of the Company’s evaluation of this error under SAB 108, the Company determined that this error was material to the consolidated balance sheet and statements of operations for the years ended December 31, 2010 and 2009. Consequently, the consolidated financial statements for those periods were restated to reflect the correction of this error. In evaluating and determining the appropriateness of applying SAB 108 to this error, the Company considered materiality both quantitatively and qualitatively as prescribed by the SEC’s Staff Accounting Bulletin No. 99. The following table reflects the impact of the above error to the consolidated balance sheet and statements of operations as of and for the years ended December 31, 2010 and 2009:

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South Dakota Soybean Processors, LLC

Notes to Consolidated Financial Statements

Note 3 -              Inventories

The Company’s inventories consist of the following as of December 31:

Finished goods and raw materials are valued at estimated market value, which approximates net realizable value. In addition, futures and option contracts are marked to market through cost of revenues, with unrealized gains and losses recorded in the above inventory amounts. Supplies and other inventories are stated at the lower of cost, determined by the first-in, first-out method, or market.

Note 4 -           Margin Deposits

The Company has margin deposits with a commodity brokerage firm used to acquire futures and option contracts to manage the price volatility risk of soybeans, crude soybean oil and soybean meal. Consistent with its inventory accounting policy, these contracts are recorded at market value. At December 31, 2011, the Company’s futures contracts all mature within twelve months.

Note 5 -           Discontinued Operations

During 2011 the Company determined to discontinue operations of its polyurethane segment, including its wholly-owned subsidiary USSC, and put the assets and business up for sale. The Company decided to discontinue and sell this division primarily because it has incurred significant operating losses over the past several years. The Company anticipates selling USSC and/or its assets in 2012. Results of operations and the related charges for discontinued operations have been classified as “Loss on discontinued operations” on the accompanying consolidated statements of operations. Assets and liabilities of the discontinued operations have been reclassified and reflected on the accompanying consolidated balance sheets as “Assets of discontinued operations” and “Liabilities of discontinued operations” accordingly. For comparative purposes, all prior periods presented have been restated to reflect the reclassifications on a consistent basis.

Sales revenue from the polyurethane segment for the years ended December 31, 2011, 2010, and 2009 were $1,495,257, $2,128,585 and $1,927,192, respectively. In conjunction with the discontinuance of operations, the Company recognized a loss on disposal of $1,104,000 in 2011 to write down the related carrying amounts to their fair values less estimated cost to sell. The losses from discontinued operations of this division were $3,592,799, $2,333,578 and $7,238,843 for the years ended December 31, 2011, 2010, and 2009, respectively.

Interest expense was allocated to discontinued operations based on the amount of debt related to the operations of the discontinued division. For the years ended December 31, 2011, 2010, and 2009, interest expense allocated to discontinued operations was $372,000, $275,000, and $241,000, respectively.

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South Dakota Soybean Processors, LLC

Notes to Consolidated Financial Statements

The assets and liabilities of the discontinued operations are presented separately under the captions “Assets of discontinued division” and “Liabilities of discontinued division,” respectively, in the accompanying balance sheets at December 31, 2011 and 2010, and consist of the following:

Note 6 -           Investments in Cooperatives

The Company’s investments in cooperatives consist of the following at December 31:

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South Dakota Soybean Processors, LLC

Notes to Consolidated Financial Statements

Note 7 -           Property and Equipment

The following is a summary of property and equipment at December 31:

Depreciation of property and equipment of continued operations amounts to $2,081,481, $1,952,485, and $1,982,189 for the years ended December 31, 2011, 2010, and 2009, respectively.

Note 8 -           Patents and Other Intangible Assets

On January 1, 2003, the Company acquired an additional 54% interest in the outstanding common stock of USSC to bring its total ownership interest to approximately 58%. The results of USSC’s operations have been consolidated in the Company’s financial statements since that date. The acquisition of a controlling interest in USSC allows the Company to develop and market soy-based polyurethane products. Subsequently, through the participation in additional equity offering, conversion of notes payable, and stock swaps, the Company has increased its majority ownership in USSC to 100% as of December 31, 2009.

The allocation of the purchase price of USSC shares on January 1, 2003 resulted in an assignment of $7,401,245 to patents. None of these patent costs recognized for financial reporting purposes is expected to be deductible for tax purposes; however, for book purposes the patents are being amortized using the straight-line method over a period of 16 to 20 years, which is the shorter of the remaining estimated economic life of the patents acquired or 20 years from the original file date. Amortization expense was $77,816, $72,973, and $476,013 for the years ended December 31, 2011, 2010, and 2009, respectively.

Annually, the Company performs an impairment test of the carrying value of the patents to determine if any impairment exists. In 2011 and 2009 the Company determined that the sum of the undiscounted cash flows attributable to the patents was less than its carrying value and that impairment write-downs were required. Accordingly, the Company calculated the estimated fair value of the intangible assets by summing the present value of the expected cash flows over its remaining useful life. The impairments were calculated by deducting the present value of the expected cash flows from the carrying value. This assessment resulted in impairment write-downs of $637,318, $0, and $4,507,289, which is included in “Loss on discontinued operations” in the accompanying Consolidated Statements of Operations for the years ended December 31, 2011, 2010, and 2009, respectively.

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South Dakota Soybean Processors, LLC

Notes to Consolidated Financial Statements

The following table provides information regarding the Company’s other intangible assets as of December 31, 2010 and 2009:

Future amortization expense related to the loan origination costs is expected to be approximately:

Note 9 -           Notes Payable – Seasonal Loan

The Company has entered into a revolving credit agreement with CoBank, which prior to the amendment described in Note 10, expires June 1, 2012. The Company may borrow up to $40 million under this agreement to finance inventory and accounts receivable. Interest accrues at a variable rate (4.30% at December 31, 2011). Advances on the revolving credit agreement are secured and limited to qualifying inventory and accounts receivable, net of any accrued commodity purchases. There were advances outstanding of $0 and $24,790,669 at December 31, 2011 and 2010, respectively. The remaining available funds to borrow under the terms of the revolving credit agreement are approximately $40,000,000 as of December 31, 2011.

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South Dakota Soybean Processors, LLC

Notes to Consolidated Financial Statements

Note 10 -        Long-Term Debt

The Company entered into an agreement as of November 10, 2011 with CoBank to amend and restate its Master Loan Agreement (MLA), which includes both the revolving term loan and the seasonal loan discussed in Note 9. Under the terms and conditions of the MLA, CoBank agreed to make advances to the Company for up to $15,500,000 on the revolving term loan. The available commitment decreases in scheduled periodic increments of $1,300,000 every six months starting September 20, 2012 until maturity on March 20, 2018. The principal balance outstanding on the revolving term loan was $14,805,001 and $13,879,200 as of December 31, 2011 and 2010, respectively. There was $695,800 of remaining commitments available to borrow on the revolving term loan as of December 31, 2011.

Under this agreement, the Company is subject to compliance with standard financial covenants and the maintenance of certain financial ratios. The Company is in violation of one of its loan covenants with CoBank as of December 31, 2011. Prior to the amendment described below, the loan covenant requires the Company to maintain a minimum working capital of $8.0 million at fiscal year-end (December 31^st) and $6.5 million at the end of each other period for which financials are to be furnished to CoBank. At December 31, 2011, working capital computed per the agreement with CoBank was approximately $6.7 million. On March 12, 2012 CoBank granted a waiver of this covenant violation.

On March 14, 2012, the Company entered into an amendment of our loan agreements with CoBank. Under the amendments, CoBank decreased the minimum working capital requirement for each period other than fiscal year-end to $5.5 million. In addition, CoBank unilaterally extended the maturity date on the seasonal loan to August 1, 2012.

The minimum principal payments on long-term debt obligations, assuming the Company will advance the remaining amounts available on the revolving term loan, are expected to be as follows:

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South Dakota Soybean Processors, LLC

Notes to Consolidated Financial Statements

Note 11 -        Employee Benefit Plans

The Company maintains a Section 401(k) plan for employees who meet the eligibility requirements set forth in the plan documents. The Company matches a percentage of employees’ contributed earnings. The amounts charged to expense under continuing operations under this plan were approximately $70,000, $66,000, and $78,000 for the years ended December 31, 2011, 2010, and 2009, respectively.

The Company has a deferred compensation plan for key employees. The Company shall pay the employees in five equal annual installments upon retirement. The future payments have been discounted at 8%. The amount recognized as expense (benefit) during the years ended December 31, 2011, 2010, and 2009 was $2,633, $(12,407), and $(37,832), respectively. The Company made payments of approximately $11,827, $0, and $0 during the years ended December 31, 2011, 2010, and 2009, respectively. Deferred compensation payable is $47,972 and $57,166 as of December 31, 2011 and 2010, respectively.

Note 12 -        Commitments

Operating Leases

The Company has operating leases for 266 rail cars from GE Capital. The leases require monthly payments of $106,250. The Company also leases 107 rail cars from Trinity Capital. This lease requires monthly payments of $45,579. The Company also leases 64 rail cars from Flagship Rail Services. This lease requires monthly payments of $24,832. The Company also leases 15 rail cars from GATX Corporation. This lease requires monthly payments of $6,375.The leases began between 1996 and 2011 and have terms ranging from 2-18 years. Lease expense for all rail cars was $2,179,818, $2,094,353, and $2,050,039 for the years ended December 31, 2011, 2010, and 2009, respectively. The Company generates revenues from the use of 322 of these rail cars on other railroads. Such revenues were $1,453,374, $1,477,159, and $1,599,166 for the years ended December 31, 2011, 2010, and 2009, respectively.

On September 1, 2011, the Company renewed a Grain Storage and Transportation Agreement with H&I Grain of Hetland, Inc. (“H&I”). This agreement is for the handling, storage and transportation of soybeans to and from the H&I facilities located in DeSmet, Hetland and Arlington, South Dakota, at established rates per bushel. The agreement provides for an annual minimum payment of $200,000. The agreement expires on August 31, 2014. Expenses under the agreements with H&I were $642,341, $681,249, and $535,995 for the years ended December 31, 2011, 2010, and 2009, respectively.

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South Dakota Soybean Processors, LLC

Notes to Consolidated Financial Statements

The Company also has a number of other operating leases for machinery and equipment. Rental expense for continuing operations under these other operating leases was $193,570, $268,652 and $683,441 for the years ended December 31, 2011, 2010, and 2009, respectively.

The following is a schedule of future minimum payments required under these operating commitments.

Letter of Credit

At December 31, 2011 the Company had an outstanding irrevocable standby letter of credit in the amount of $212,000, expiring in October 2013. The letter is being maintained as security for performance on a long-term contract with a natural gas supplier.

Note 13 -        Cash Flow Information

The following is a schedule of changes in assets and liabilities used to determine cash from operating activities:

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South Dakota Soybean Processors, LLC

Notes to Consolidated Financial Statements

Note 14 -        Derivative Instruments and Hedging Activities

In the ordinary course of business, the Company enters into contractual arrangements as a means of managing exposure to changes in commodity prices. The Company’s derivative instruments primarily consist of commodity futures, options and forward contracts. Although these contracts may be effective economic hedges of specified risks, they are not designated as, nor accounted for, as hedging instruments. These contracts are recorded on the Company’s consolidated balance sheets at fair value as discussed in Note 15, Fair Value of Financial Instruments.

As of December 31, 2011 and 2010, the value of the Company’s open futures, options and forward contracts was approximately $(3,235,056) and $(1,175,118), respectively.

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South Dakota Soybean Processors, LLC

Notes to Consolidated Financial Statements