SOUTH DAKOTA SOYBEAN PROCESSORS LLC

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 soybean 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 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. Additionally, demand for soybeans is affected by changes in international, national, regional, and local economic conditions, and demographic trends. The increased production of soybean crops in South America and the rising demand for soybeans in emerging nations such as China and India have increased competition in the soybean market.

We are affected by inflation. We have experienced and anticipate continued effects of inflation on costs such as soybeans, materials, labor, natural gas, and electricity. In response to inflationary pressures, the U.S. Federal Reserve has maintained higher interest rates, which has resulted in continued uncertainty and volatility in financial markets and increased borrowing costs under our revolving credit facilities. Although inflation has subsided the past few months, inflation and its effects, many of which are beyond our control, could escalate in the future. We may be unable to pass on all of our increased costs as a result of inflation to customers. Accordingly, inflationary pressures could have a material and adverse effect on our business.

Our business operations and demand for our products are highly dependent on certain global and regional factors which are outside our control. 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 business.

Current and future geopolitical events outside of our control could adversely impact our business. We face risks related to geopolitical events, international hostility, epidemics, outbreaks and other macroeconomic events that are outside of our control. The occurrence of certain geopolitical events, including those arising from war, military conflicts, terrorist activity, international hostility, public health crises, tariffs, and the economic impact of global trade tensions, could significantly disrupt our business and operational plans and adversely affect our results of operations, cash flows, financial condition and liquidity. For example, in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur.

Soybean production is subject to U.S. and foreign policies and regulations that materially affect operations. Governmental policies affecting the agricultural industry, such as taxes, tariffs, duties, subsidies, incentives, acreage control, and import and export restrictions on agricultural commodities and commodity products, can influence the planting of certain crops, the location and size of crop production, the volume and types of imports and exports, and industry profitability. Additionally, soybean production is affected by laws and regulations relating to, but not limited to, the sourcing, transporting, storing, and processing of agricultural raw materials as well as the transporting, storing, and distributing of related agricultural products. In addition, international trade disputes can adversely affect agricultural commodity trade flows by limiting or disrupting trade between countries or regions.

Our business and operations may be affected by weather conditions that are outside of our control. For example:

•Weather conditions during the spring planting season and early summer crop nutrient and crop protection application season affect product volumes and profitability.

•Adverse weather conditions, such as heavy snow or rainfall and any flooding that results, may cause delays in or prevent soybeans from being planted which could affect our ability to procure soybeans for production and increase costs.

•Changes in weather patterns and conditions, including changes in rainfall and storm patterns and intensities, droughts, water shortages, and temperature levels, could adversely impact our costs and business operations; the location, cost and competitiveness of commodity agricultural production, related storage and processing facilities; and demand for agricultural commodities. These effects could significantly reduce demand for the products we sell to or buy from agricultural producers and local elevators, and therefore could adversely impact our business.

We could be materially impacted in the future if a health epidemic, pandemic, or similar outbreak would arise in the future. We may be unable to perform fully on our contractual obligations, our supply chain and logistical networks may be affected, and costs and working capital needs may increase. These cost increases may not be fully recoverable or adequately covered by insurance. In addition, demand for certain products, particularly biofuels and ingredients incorporated into food that support the food services channels, could be materially impacted from a prolonged regional or global outbreak, leading to government-imposed lockdowns, quarantines, or other restrictions.

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 facilities caused by a variety of factors, many of which are beyond our control. These cost increases could arise from an inadequate supply of soybeans and a resulting price increase which is not accompanied by an increase in the price for soybean meal and oil. Labor costs can also increase over time, particularly if there is a 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 become 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 Board of Trade. 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 our facility 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 not diversified. Our success depends primarily on our ability to profitably operate our soybean processing and soybean oil refining facilities. We do not have any other material lines of business or other material sources of revenue if we are unable to operate our soybean processing and soybean oil refining facilities. 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 the 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 challenges for us, because we operate in a specialized industry and our business is located in a rural area. Key employees are in high demand and are often subject to competing employment offers in the agricultural value-added industries within the local and regional area. Any loss of the key employees or the failure of these 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 be unable 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 major soybean processors such as Archer-Daniels Midland (ADM), Cargill, Bunge, and Ag Processing (AGP), among others, all of which have significantly greater quantities of soybean products than we do and may achieve higher operating efficiencies and lower costs due to their scale. AGP's processing facility in Aberdeen, South Dakota, could increase the competition for soybeans and adversely affect our business.

Our profitability is influenced by the protein and moisture content of soybeans in the local area. The northern portion of the western soybean belt, where our two soybean crushing facilities are located, typically produces a lower protein content soybean, which results in 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 facilities 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 facilities also influences our profitability and the efficiency of our facilities 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. The price of electricity, natural gas and propane, the primary sources of energy for our facilities, have steadily increased the last few years. If the trend in electricity, natural gas and propane prices continues, our energy costs will remain high and could adversely affect our profitability and operating results.

Transportation costs are a factor in the price of soybean meal and oil, and increased transportation costs could adversely affect our profitability. Soybean meal and oil may be shipped by trucks, rail cars, and barges. Added transportation costs are a significant factor in the price of our products, and we may be more vulnerable to increases in transportation costs than other producers because our locations in Volga and Miller are more remote than that of most of our competitors. Today, most of our products are sold FOB Volga or Miller, 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.

The rapid expansion of domestic soybean processing capacity may lead to an oversupply of soybean meal and oil, which could compress crush margins and adversely affect our profitability. We anticipate significant increases in industry-wide soybean processing and refining capacity as new facilities are commissioned and existing facilities are expanded. If the growth in demand—particularly from the renewable fuels sector for soybean oil or the livestock industry for soybean meal—does not keep pace with this increased supply, market prices for these commodities may decline significantly. Such an oversupply could result in compressed crush spreads (the margin between the cost of raw soybeans and the sales price of processed products) and increased competition for soybeans which could increase input costs. Any sustained imbalance between production capacity and global consumption could have a material adverse effect on our business.

We are exposed to risk of nonperformance and nonpayment by counterparties. We are exposed to risk of nonperformance and nonpayment by counterparties, whether pursuant to contracts or otherwise. Risk of nonperformance and nonpayment by counterparties includes the inability or refusal of a counterparty to pay us; the inability or refusal to perform because of a counterparty's financial condition and liquidity, operational failures, labor issues, cybersecurity events, outbreaks of disease or for any other reason; and risk that the counterparty will refuse to perform a contract during a period of price fluctuations where contract prices are significantly different than current market prices. In the event we experience significant nonperformance or nonpayment by counterparties, our business could be materially and adversely affected.

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 facilities 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 facilities shutdowns.

New environmental laws and regulations, including new regulations relating to alternative energy sources and the risk of 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 that could adversely affect our operating results. These risks 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. Any liability resulting from 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. 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 are required to segregate genetically modified soybeans and the products generated from these soybeans. Some soybean producers in our area have been planting genetically modified, or GMO, 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.

There is no public market for our units. There is no public trading market for our units. While we have established a private online matching service in order to facilitate the transfer of units among our members, the transfer of units on this service is severely limited. The service has been designed to comply with federal tax laws and IRS regulations governing a “qualified matching service,” as well as state and federal securities laws. Under these rules, there are detailed timelines and restrictions that must be followed with respect to offers and sales of units. As a result, capital units held by our members may not be easily resold and members may be required to hold their units indefinitely. Even if a member is able to resell units, the price may be less than the member's original investment for the units or may otherwise be unattractive to the member.

There are significant restrictions on the transfer of our units. To protect our status as a partnership for federal income tax purposes and to assure no public trading market for our units develops or exists, our units are subject to significant restrictions on transfer. All transfers of units must comply with the transfer provisions of our operating agreement and the capital units transfer system and are subject to approval by our board of managers. Our board of managers reserves the right not to approve any transfer of units that could cause us to lose our partnership tax status or violate federal or state securities laws. As a result, members may not be able to transfer their units and may be required to assume the risks of the investment for an indefinite period of time.

Members may realize taxable income without cash distributions, and may have to use funds from other sources to fund tax liabilities. Because we are taxed as a partnership for U.S. federal income tax purposes, members may realize taxable income in excess of cash distributions by us. There can be no assurance that we will pay distributions at a specific rate or at all. As a result, members may have to use funds from other sources to pay their tax liability.

We rely on information technology and any failure, inadequacy, interruption, or security lapse of that technology, including any cybersecurity incidents, could harm our ability to operate its business effectively. Hackers, government-backed threat actors, and organized crime may be able to penetrate our network or systems, misappropriate or compromise our confidential information or that of third parties, create system disruptions, corrupt data, or cause shutdowns. Using different tools and methodologies the threat actors may be able to deploy malware that attacks our systems or our supplier’s systems, or otherwise exploits any security vulnerabilities of our facilities and equipment. Vulnerabilities in our systems can also occur due to a lack of robustness, quality, and integrity, in our systems as a whole. While we employ a number of technical, organizational, and physical protective measures, these measures may fail to prevent or detect all attacks on or weaknesses in its systems.

We manage and store various proprietary, sensitive, and confidential information and data relating to our business as well as from our suppliers and customers. Breaches of this information and data due to insufficient security measures, accidental loss, inadvertent disclosure, or unapproved dissemination, including incidents as a result of fraud, trickery, or other forms of deception, could expose us or our customers or suppliers to a risk of loss or misuse of this information.

Any claim that our facilities, equipment, products, or systems are subject to cybersecurity risk or data breaches, whether legitimate or not, could have a material adverse effect on our business.

To the extent we experience any cybersecurity incidents in the future, our relationships with our customers and suppliers may be materially impacted, our brand and reputation may be harmed, and we could incur substantial costs in responding to and remediating the incidents and in resolving any investigations or disputes that may result, any of which could have a material adverse effect on our business. In addition, the cost and operational consequences of implementing and adding further data protection measures could be significant.

We could be adversely affected by cyber-attacks, data security breaches and significant information technology systems interruptions. We rely on network infrastructure, enterprise applications, and internal and external technology systems for operational, marketing support and sales, and product development activities. The hardware and software systems related to such activities are subject to damage from lightning, tornados, fire, power loss, telecommunication failures, cyber-attacks and other similar events. They are also subject to acts such as computer viruses, physical or electronic vandalism or other similar disruptions that could cause system interruptions and loss of critical data, and could prevent us from fulfilling customers’ orders.

We will continue to dedicate resources and incur expenses to maintain and update on an ongoing basis the systems and processes that are designed to mitigate the information security risks we face and protect the security of our computer systems, software, networks and other technology assets against attempts by unauthorized parties to obtain access to confidential information, disrupt or degrade service or cause other damage. We have implemented cybersecurity measures, yet our information technology systems may still be vulnerable to cybersecurity threats and other electronic security breaches. While we have taken reasonable efforts to protect ourselves, we cannot assure our members that our security measures would be sufficient in the future. Any event that causes failures or interruption in such hardware or software systems could result in disruption of our business operations, have a negative impact on our operating results, and damage our reputation, which could negatively affect our business.