As used in Management's Discussion and Analysis, unless the context otherwise requires, the terms "Company," "we," or "our" when referenced to after the Reorganization mean MGP Ingredients, Inc. (formerly named MGPI Holdings, Inc.) and its consolidated subsidiaries, and these same terms when referenced prior to the Reorganization mean Processing (formerly named MGP Ingredients, Inc.) and its consolidated subsidiaries.

As previously announced, on August 25, 2011 we changed our fiscal year end from June 30 to December 31. We filed a transition report on Form 10-K with the SEC for the period beginning July 1, 2011 and ending December 31, 2011. The discussion below compares results for the quarter and year to date periods ended June 30, 2012 to the quarter and six-month to date periods ended June 30, 2011.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes included in this Form 10-Q, as well as our audited consolidated financial statements and accompanying notes and Management's Discussion and Analysis of Financial Condition and Results of Operations-General, set forth in Items 8 and Item 7, respectively of our Form 10-K for the six-month transition period ended December 31, 2011.

RECENT INITIATIVES

Acquisition of the Indiana Distillery

On December 27, 2011, we acquired substantially all the assets used by Lawrenceburg Distillers Indiana, LLC ("LDI") in its beverage alcohol business, and we now produce premium bourbon, corn and rye whiskeys, gin, grain neutral spirits and distillers feed at our distillery located in Lawrenceburg and Greendale, Indiana ("Indiana Distillery"). The purchase price of the acquisition was equal to the current assets minus current liabilities as of December 27, 2011, which was estimated at closing to be $11,041. During April 2012, management and the seller completed working capital true-ups. The result of the true-ups was not material to our financial results.

Since acquiring the distillery operations of LDI, we have taken several steps to improve its profitability. We recently completed the planning stages of implementing an SAP information technology system for accounting, sales, supply chain and manufacturing at this facility. We went live on SAP on July 1, 2012. We have spent $134 on this implementation project through June 30, 2012 and we expect future expenditures to be approximately $280.

During the quarter ended March 31, 2012, MGPI-I and the union that covers certain employees at the Indiana Distillery ratified a new multi-year collective bargaining unit agreement, that will terminate December 31, 2017.

In conjunction with the acquisition of the distillery operations of LDI, we acquired a grain elevator that was not expected to be used, which was reported as Assets held for sale at December 31, 2011. On March 21, 2012, we sold this facility and its related assets for $2,252, resulting in a loss of $48. Net proceeds received, after fees and prorated taxes, totaled $2,232.

Ownership change of ICP

On February 1, 2012, Illinois Corn Processing Holdings ("ICP Holdings"), an affiliate of SEACOR Energy, Inc., exercised its option to purchase from us an additional 20 percent of the membership interest in ICP. The proceeds for this sale approximated $9,103. Following its exercise, ICP Holdings owns 70 percent of ICP, is entitled to name 4 of ICP's 6 advisory board members, and generally has control of ICP's day-to-day operations. The Company owns 30 percent of ICP and is entitled to name 2 of ICP's 6 advisory board members. The transaction resulted in a pre-tax gain of $4,055 during the quarter ended March 31, 2012.

Grain Supply Agreements

During the quarter ended March 31, 2012, we entered a grain supply contract for the Indiana Distillery and during the quarter ended June 30, 2012 we extended this agreement for use at our Atchison facility. The grain supply contracts permit us to purchase corn for delivery up to 12 months in the future, at fixed prices. The pricing for these contracts is based on a formula using several factors.

Supply for commodities has been tight during the first six months of 2012 due, in part, to the drought in the United States. Market prices for commodities, including corn, have been near historic highs in June 2012, and accordingly, this impacts the pricing we pay under our grain supply agreements.

Use of Hedge Accounting

Reducing earnings volatility from commodity price swings has long been at the forefront of our risk management strategy, and in early calendar 2011, the Company's Board of Directors made the decision to adopt hedge accounting. Effective July 1, 2011, we elected to restart the use of hedge accounting for qualifying derivative contracts entered into on and after July 1, 2011. For further discussion related to the accounting policy and accounting requirements for our derivative instruments, see Note 1. Accounting Policies and Basis of Presentation - Derivatives and Note 6. Derivative Instruments and Fair Value Measurements set forth in Part I, Item 1.

Our utilization of hedge accounting proved to mitigate a portion of our earnings volatility that had been experienced over the few years leading up to the restart of hedge accounting.

In connection with our new grain supply agreements discussed above, we now order corn anywhere from a month to 12 months in the future. We have determined that the firm commitments to purchase corn under the terms of these new agreements meet the normal purchases and sales exception as defined under ASC 815, Derivative and Hedging, and exclude the fair value of these commitments from recognition in our financial statements until the actual contracts are physically settled. Accordingly, during the quarter ended March 31, 2012, we de-designated certain cash flow hedges, which resulted in a reclassification of a $27 loss from accumulated other comprehensive income into earnings for the quarter ended March 31, 2012. As of June 30, 2012, we had no exchange traded corn futures contracts designated as cash flow hedges. We expect the volume of corn futures and options and the use of hedge accounting to be reduced in the future under our current strategy.

RESULTS OF OPERATIONS

Consolidated losses for the quarter ended June 30, 2012 decreased compared to the same period a year ago, with a net loss of $850 on consolidated net sales of $85,534 versus a net loss of $10,258 on consolidated net sales of $68,798 in the quarter ended June 30, 2011.

The increase in net sales was primarily the result of our increased sales volume in the distillery products segment. The loss for the quarter ended June 30, 2012 was driven by higher selling, general and administrative expenses and a 1-week shut-down of the Atchison plant for routine maintenance and general capital project upgrades.

Our improved quarter-over-quarter results were greatly impacted by the loss experienced during the quarter ended June 30, 2011. Contributing to our loss for the quarter ended June 30, 2011 was a $5,499 unfavorable impact to cost of sales from changes in the fair value of open derivative hedge contracts, a significant portion of which occurred in the last two days of the quarter, high raw material costs, a temporary production interruption, a lag in the adjustment of our alcohol selling prices in step with high corn prices, and low gross margins in our ingredients solutions segment. The temporary production interruption during the quarter ended June 30, 2011 resulted from a one-week outage related to installing the new distillery water cooling system at the Atchison plant. This caused production for the month of May 2011 to be below normal. Our joint venture, ICP, was similarly impacted during the quarter ended June 30, 2011 by high raw material costs and unrealized losses on open commodity derivative contracts as well as a two-week shut-down for maintenance. ICP experienced a $3,139 net loss for the quarter ended June 30, 2011, of which $1,570 was our 50 percent share.

In our distillery products segment, we achieved both volume and pricing increases compared to the same period a year ago. In our ingredient solutions segment we experienced a decrease in volume, partially offset by an increase in pricing. Other segment sales increased slightly. Pricing in our distillery products and ingredient solutions segments increased whereas the pricing for corn and flour decreased (exclusive of the impact related to the accounting for open commodity contracts), which led to an increase in return on sales in these segments. In our distillery products segment, return on sales increased from
(7.0) percent for the quarter ended June 30, 2011 to 5.3 percent for the quarter ended June 30, 2012. Our return on sales in our ingredients solutions segment increased from (0.9) percent for the quarter ended June 30, 2011 to 7.0 percent for the quarter ended June 30, 2012.

Consolidated earnings for the year to date period ended June 30, 2012 increased compared to the same period a year ago, with net income of $1,026 on consolidated net sales of $171,878 versus a net loss of $9,557 on consolidated net sales of $132,986 in the year to date period ended June 30, 2011.

The increase in net sales was primarily the result of our increased sales volume in the distillery products segment. Our net income increased for the year to date period primarily due to the quarter-over-quarter increase in earnings for the quarter ended June 30, 2012 described above as well as a $4,055 gain recorded during the quarter ended March 31, 2012 related to the sale of a 20 percent interest in our joint venture, ICP, increased earnings from our joint venture operations and a lower loss on the mark-to-market adjustment for open derivative contracts. These increases to net income were partially offset by increased general and administrative expenses related to the LDI acquisition and our corporate restructuring.

In our distillery products segment, we achieved both volume and pricing increases compared to the same period a year ago. In our ingredient solutions segment we experienced a decrease in volume, partially offset by an increase in pricing. Other segment sales declined slightly. Pricing in our distillery products segment out-paced the increased costs for corn (exclusive of the impact related to the accounting for open commodity contracts), which led to an increase in return on sales. In our distillery products segment, return on sales increased from 4.2 percent for the year to date period ended June 30, 2011, to 4.5 percent for the year to date period ended June 30, 2012. Pricing in our ingredients solutions segment increased whereas the pricing for flour decreased, which led to an increase in return on sales. Our ingredients solutions segment return on sales increased from (0.1) percent for the year to date period ended June 30, 2011, to 9.5 percent for the year to date period ended June 30, 2012.

NET SALES

Net sales for the quarter ended June 30, 2012 increased $16,736, or 24.3 percent, compared to the quarter ended June 30, 2011. The increase was primarily attributable to increased net sales in the distillery products segment partially offset by decreased net sales in the ingredient solutions segment. Net sales in the distillery products segment as a whole increased primarily as a result of higher volumes of food grade alcohol, as well as from increased pricing. Production from our new Indiana Distillery contributed to increased sales of food grade alcohol during the quarter ended June 30, 2012, which we did not own the same period a year ago. The decrease in net sales in the ingredient solutions segment was due to decreased volume partially offset by improved pricing. Our other segment experienced a de minimis increase in net sales due to higher volumes partially offset by decreased pricing.

Consistent with the second quarter of fiscal 2012, net sales for the year to date period ended June 30, 2012 increased $38,892, or 29.2 percent, compared to the quarter ended June 30, 2011. The increase was primarily attributable to increased net sales in the distillery products segment partially offset by decreased net sales in the ingredient solutions segment. Net sales in the distillery products segment as a whole increased primarily as a result of higher volumes of food grade alcohol, as well as from increased prices per unit. Production from our new Indiana Distillery contributed to increased sales of food grade alcohol during the year to date period ended June 30, 2012, which we did not own the same period a year ago. The decrease in net sales in the ingredient solutions segment was due to decreased volume partially offset by improved pricing. Our other segment experienced a de minimis increase in net sales due to slight volume and pricing increases.

COST OF SALES

For the quarter ended June 30, 2012, cost of sales increased $8,032, or 11.2 percent, compared to the quarter ended June 30, 2011. For the quarter ended June 30, 2012, cost of sales was 93.1 percent of net sales, which generated a gross profit margin of 6.9 percent. For the quarter ended June 30, 2011, cost of sales was 104.1 percent of net sales, which generated a negative gross margin of 4.1 percent.

Our higher overall costs were primarily the result of production increases related to distillery products. Production of food grade alcohol from our new Indiana Distillery contributed to the overall increase in cost of sales during the quarter ended June 30, 2012, which we did not own the same period a year ago. These cost increases were partially offset by a favorable quarter-over-quarter impact related to the accounting for open commodity derivative contracts, lower per-bushel corn prices, per-pound flour prices and natural gas prices. For the quarter ended June 30, 2012, our open commodity contracts had a $2,002 favorable impact to cost of sales compared to a $5,499 unfavorable impact for the quarter ended June 30, 2011. We use these contracts to mitigate the impact of changes in commodity prices. We saw decreases in the per-bushel cost of corn, the per-pound cost of flour (exclusive of the impact related to the accounting for open commodity contracts), and the per-million cubic foot cost of natural gas, which averaged 4.8 percent, 7.8 percent, and 13.0 percent lower, respectively, than the quarter ended June 30, 2011.

For the year to date period ended June 30, 2012, cost of sales increased $31,128, or 24.1 percent, compared to the year to date period ended June 30, 2011. For the year to date period ended June 30, 2012, cost of sales was 93.3 percent of net sales, which generated a gross profit margin of 6.7 percent. For the year to date period ended June 30, 2011, cost of sales was 97.2 percent of net sales, which generated a gross margin of 2.8 percent.

For the year to date period ended June 30, 2012, our higher overall costs were directly the result of production increases related to distillery products and higher corn prices. Production of food grade alcohol from our new Indiana Distillery, which we did not own the same period a year ago, contributed to the overall increase in cost of sales during the year to date period ended June 30, 2012. We saw an increase in the per-bushel cost of corn, which averaged 0.3 percent higher than the year to date period ended June 30, 2011 (exclusive of the impact related to the accounting for open commodity contracts). These cost increases were partially offset by a period-over-period favorable impact related to the accounting for open commodity derivative contracts and lower per-pound flour prices and natural gas prices. For the year to date period ended June 30, 2012, our open commodity contracts had a $1,001 favorable impact to cost of sales compared to a $3,949 unfavorable impact for the year to date period ended June 30, 2011. We use these contracts to mitigate the impact of changes in commodity prices. We saw decreases in the per-pound cost of flour and the per-million cubic foot cost of natural gas, which averaged nearly 1.6 percent and 12.4 percent lower, respectively, than the year to date period ended June 30, 2011.

For the quarter and year to date periods ended June 30, 2011, hedge accounting was not used as we did not restart our use of hedge accounting until July 1, 2011 (for qualifying derivative contracts entered into on and after July 1, 2011) as further discussed in "- Recent Initiatives" and in Note 1. Accounting Policies and Basis of Presentation set forth in Item I, Financial Statements of this Form 10-Q and incorporated herein by reference. In connection with the grain supply agreements discussed previously, we de-designated certain cash flow hedges, which resulted in a reclassification of a $27 loss from accumulated other comprehensive income into cost of sales during the quarter ended March 31, 2012. As of June 30, 2012, we had no derivative contracts designated as cash flow hedges.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses for the quarter ended June 30, 2012 increased by $1,405, or 28.8 percent, compared to the quarter ended June 30, 2011. This increase was primarily due to an increase in professional fees, higher personnel costs and long-term incentives, and increased accruals associated with our short-term incentive program. The higher personnel costs were impacted by our acquisition of LDI's beverage alcohol business in late 2011.

Selling, general and administrative expenses for the year to date period ended June 30, 2012 increased by $3,463, or 32.8 percent, compared to the year to date period ended June 30, 2011. This increase was primarily due to an increase in professional fees, higher personnel costs and long-term incentives, and increased accruals associated with our short-term incentive program. Professional fees increased primarily due to our corporate reorganization and our acquisition of LDI's distillery business. The higher personnel costs were impacted by our acquisition of LDI's distillery business in late 2011.

GAIN ON SALE OF JOINT VENTURE INTEREST

As previously discussed, on February 1, 2012, ICP Holdings exercised its option to purchase from the Company an additional 20 percent of the membership interest in ICP. The sales price was $9,103 and the transaction resulted in a pre-tax gain of $4,055 for the year to date period ended June 30, 2012.

INTEREST EXPENSE

Interest expense for the quarter and year to date periods ended June 30, 2012 increased $232, and $395, respectively, compared to the same periods ended June 30, 2011. These increases were primarily the result of higher average daily balance and interest rate on our line of credit as well as higher long term debt compared to the same period a year ago.

EQUITY IN EARNINGS (LOSS) OF JOINT VENTURES

ICP

On February 1, 2012, ICP Holdings exercised its option to purchase an additional 20 percent of the membership interest in ICP. Following its exercise, the Company owns 30 percent of ICP.

For the quarter ended June 30, 2012, ICP had a loss of $369. As a 30 percent owner, our portion of the loss was $110. For the quarter ended June 30, 2011, ICP had a loss of $4,625. As a 50 percent owner, our portion of the loss was $2,313.

For the year to date periods ended June 30, 2012, ICP had earnings of $759. As a 50 percent owner for the month of January 2012 and a 30 percent owner for the months of February through June 2012, our portion of the earnings was $363. For the year to date periods ended June 30, 2011, ICP had a loss of $4,468. As a 50 percent owner, our portion of the loss was $2,234.

D.M. Ingredients, GmbH ("DMI")

On July 17, 2007, we completed a transaction with Crespel and Dieters GmbH & Co. KG for the formation and financing of a joint venture, DMI, located in Ibbenburen, Germany. DMI's primary operation is the production of specialty ingredients for marketing by MGPI domestically and, through Crespel and Dieters and third parties, internationally. We own a 50 percent interest in DMI, and account for it using the equity method of accounting. As of June 30, 2012, we had invested $571 in DMI since July 2007.

For the quarters ended June 30, 2012 and 2011, DMI had earnings (loss) of $(65) and $34, respectively. As a 50 percent joint venture holder, our equity in earnings (loss) was $(33) and $17 for the quarters ended June 30, 2012 and 2011, respectively.

For the year to date periods ended June 30, 2012 and 2011, DMI had earnings
(loss) of $(137) and $124, respectively. As a 50 percent joint venture holder, our equity in earnings (loss) was $(69) and $62 for the year to date periods ended June 30, 2012 and 2011, respectively.

DMI's functional currency is the European Union Euro. Accordingly, changes in the holding value of the Company's investment in DMI resulting from changes in the exchange rate between the U.S. Dollar and the European Union Euro are recorded in other comprehensive income as a translation adjustment on unconsolidated foreign subsidiary net of deferred taxes.

NET INCOME (LOSS)

As the result of the factors outlined above, we experienced a net income (loss) of $(850) and $1,026 in the quarter and year to date periods ended June 30, 2012, respectively, compared to a net loss of $10,258 and $9,557 in the quarter and year to date periods ended June 30, 2011, respectively.

SEGMENT RESULTS

The following is a summary of revenues and pre-tax profits / (loss) allocated to
each reportable operating segment for the quarter and year to date periods ended
June 30, 2012 and 2011. For additional information regarding our operating
segments, see Note 7. Operating Segments included under Part 1, Item 1,
Financial Statements of this Form 10-Q and incorporated herein by reference.

                            Quarter Ended            Year to Date Ended
                       June 30,      June 30,      June 30,      June 30,
                         2012          2011          2012          2011
Distillery products
Net Sales              $  71,196     $  52,965     $ 143,681     $ 103,293
Pre-Tax Income             3,762        (3,712 )       6,448         4,294
Ingredient solutions
Net Sales                 14,090        15,604        27,668        29,178
Pre-Tax Income               987          (136 )       2,624           (35 )
Other
Net Sales                    248           229           529           515
Pre-Tax Loss                (150 )        (209 )        (246 )        (385 )

DISTILLERY PRODUCTS

Total distillery products sales revenue for the quarter ended June 30, 2012 increased $18,230, or 34.4 percent, compared to the quarter ended June 30, 2011. This increase was primarily attributable to an increase in sales of high quality food grade alcohol of 37.8 percent, which was due to an 18.0 percent increase in per unit pricing as well as a 16.8 percent increase in volume compared to the same period a year ago. With the recent acquisition of the Indiana Distillery, which we did not own the same period a year ago, we added significant volume to our food grade alcohol sales. Also contributing to the overall sales increase in the distillery products segment were increases of $2,219 and $552 in distillers feed and warehousing revenue earned at our Indiana Distillery, respectively, for the quarter ended June 30, 2012 compared to the quarter ended June 30, 2011. Our pricing increased whereas our pricing for corn
(exclusive of the impact related to the accounting for open commodity contracts)
and natural gas decreased. For the quarter ended June 30, 2012, the per-bushel cost of corn averaged nearly 4.8 percent lower than the quarter ended June 30, 2011. Corn prices in of spring of 2011 were negatively impacted by flooding conditions in and around Atchison, Kansas. The per-million cubic foot cost of natural gas averaged nearly 13.0 percent lower than the same period a year ago. While overall revenues for distillery products increased for the quarter ended June 30, 2012 as compared to the same quarter a year ago, return on sales increased as previously described in "-General,", which was primarily driven by a favorable swing in earnings related to the accounting for open commodity contracts. For the quarter ended June 30, 2012, our open commodity contracts had a $2,002 favorable impact to cost of sales compared to a $5,499 unfavorable impact for the quarter ended June 30, 2011.

Consistent with the quarter ended June 30, 2012, total distillery products sales revenue for the year to date period ended June 30, 2012 increased $40,388, or 39.1 percent, compared to the year to date period ended June 30, 2011. This increase was primarily attributable to an increase in sales of high quality food grade alcohol of 41.0 percent, which was due to a 22.9 percent increase in per unit pricing as well as a 14.8 percent increase in volume compared to the same period a year ago. With the recent acquisition of the Indiana Distillery, we did not own the same period a year ago, we added significant volume to our food grade alcohol sales. Also contributing to the overall sales increase in the distillery products segment were increases of $5,943 and $1,177, respectively, in distillers feed and warehousing revenue earned at our Indiana Distillery for the year to date period ended June 30, 2012 compared to the year to date period ended June 30, 2011. Our pricing out-paced the increased costs for corn (exclusive of the impact related to the accounting for open commodity contracts), while natural gas pricing decreased. For the year to date period ended June 30, 2012, the per-bushel cost of corn averaged nearly 0.3 percent higher than the year to date period ended June 30, 2011. On the other hand, the per-million cubic foot cost of natural gas averaged nearly 12.4 percent lower than the same period a year ago. While overall revenues for distillery products increased for the year to date period ended June 30, 2012 as compared to the same year to date period a year ago, return on sales increased as previously described in "-General," which was primarily driven by an favorable swing in earnings related to the accounting for open commodity contracts. For the year to date period ended June 30, 2012, our open commodity contracts had a $1,001 favorable impact to cost of sales compared to a $3,946 unfavorable impact for the year to date period ended June 30, 2011.

INGREDIENT SOLUTIONS

Total ingredient solutions sales revenue for the quarter ended June 30, 2012 decreased by $1,514, or 9.7 percent, compared to the quarter ended June 30, 2011. Specialty starches saw a 23.9 percent decrease in revenues compared to the same period a year ago due to a volume decrease partially offset by an increase in per unit pricing. Revenues for specialty proteins for the quarter ended June 30, 2012 increased 2.1 percent compared to the quarter ended June 30, 2011 due to slight increases in volume and per unit pricing. Commodity starch saw a 21.1 increase in revenues compared the same period a year ago due to per unit pricing and volume increases. Revenues for commodity starches and proteins totaled 17.2 percent and 13.1 percent of total segment sales for the quarters ended June 30, 2012 and 2011, respectively. While we experienced a quarter-over-quarter increase in our commodity products as a percentage of total segment sales, our . . .