TEXT-S&P revises Dairy Farmers of America outlook to negative

Overview
-- We expect Kansas City, Mo.-based Dairy Farmers of America Inc.'s
(DFA's) proposed new financing initiatives to result in an increase in the
company's total debt.
-- We believe DFA's near-term operating performance may suffer under
current market conditions, including increases in raw milk prices resulting in
part from the ongoing drought in the U.S. The company also faces litigation
uncertainties.
-- We are affirming our 'BBB+' corporate credit rating on DFA and
revising the outlook to negative from stable.
-- The negative outlook reflects our opinion that market challenges may
result in weaker operating performance which, combined with some increase in
debt, may lead to a leverage increase over the near term.

Rating Action
On Oct. 9, 2012, Standard & Poor's Ratings Services revised its rating outlook
on Dairy Farmers of America Inc. (DFA) to negative from stable. At the same
time, we affirmed all of our DFA ratings, including the 'BBB+' corporate
credit rating.

DFA had about $815 million of total debt outstanding at June 30, 2012.

Rationale
The ratings on DFA reflect Standard & Poor's view that the company's financial
risk profile is "intermediate" and business risk profile is "satisfactory."

Key credit factors in our assessment of DFA's business risk profile include
the company's strong market position, diverse portfolio of products and brand
names, and limited geographical diversification. We also consider DFA's
exposure to U.S. dairy industry conditions, characterized by reduced fluid
milk consumption, near-term reduction in raw milk production volumes, excess
processing capacity in some regions, and volatile raw milk and dairy product
prices.

DFA is the leading dairy cooperative in the U.S., marketing about 30% of total
domestic fluid milk production. The company benefits from its significant
economies of scale and extensive distribution capabilities. DFA has strong
relationships with a national network of regional milk bottlers, including its
own plants and through its affiliate network, and has long-term milk supply
agreements with regional and national dairy processors, including Dean Foods
Co., the largest national dairy processor and distributor. While milk
marketing represents the majority of DFA's sales, the company's commercial
operations are a very significant and growing portion of its overall business,
and include dairy products processing under DFA's brands, contract
manufacturing, and joint ventures. We believe DFA is exposed to customer
concentration risk as its top 10 customers represent over 50% of sales,
reflecting the consolidating trends in this mature industry and with
retailers. DFA also has limited geographic diversity, with less than 10% of
its sales outside of the U.S.

The domestic dairy business is mature and is subject to significant commodity
exposure, including the volatility of raw milk prices. The sector is also
highly fragmented and susceptible to overcapacity on a regional basis. While
the demand characteristics of fluid milk are relatively stable, the industry
trend for fluid milk consumption is gradually declining. The federal
government, through dairy support programs and marketing orders, regulates the
industry.

Despite several periods of weak farmer profitability in the industry over the
last few years (reflecting higher input costs relative to milk prices),
aggregate milk production levels did not decline significantly. However, the
USDA forecasts U.S. milk production to decline slightly during the remainder
of 2012 and into 2013, with total annual milk production of 199.9 billion and
198.9 billion pounds, respectively. This reflects, in part, the ongoing
drought conditions and recent reductions in cow numbers and expected milk
output per cow due to rising feed prices and high temperatures, although the
medium- to longer-term impact on milk production from this year's drought
remains unclear. The average all-milk price (based on various dairy product
prices) has been volatile at $20.14 per hundredweight (cwt) in 2011, following
$16.29 per cwt in 2010, $12.82 per cwt in 2009, and $18.41 per cwt in 2008.
The USDA's Sept. 18, 2012, forecast for the average all-milk price in 2012 is
about $17.90 per cwt, with declines in milk prices during the first half of
this year reversing somewhat in the second half.

DFA's business mix, which includes low margin commodity raw milk marketing and
higher margin value-added dairy products processing, had supported more stable
operating performance during the recent period of volatile milk pricing,
compared to some of its dairy processor competitors. While DFA's producer
cooperative members benefit from increased milk prices, and its milk marketing
operations largely passes through rising milk costs, DFA's dairy processing
operations' margins, including its affiliates, are more susceptible to
increases in the cost of raw milk. As with many other dairy processors,
margins were pressured as raw milk input costs increased throughout most of
2011 while the ability to pass through these higher costs in wholesale and
retail prices was limited. DFA's sales level is heavily influenced by milk
price levels and trends, as reflected in a 7.5% decrease in total sales in the
first half of 2012 and a 32.0% increase during full year 2011, relative to the
comparable prior year periods. DFA's gross margin on a last-12-month basis was
3.0% in the second quarter of 2012, above the 2.0% level of the second quarter
of 2011, reflecting in part the decline in average milk prices beginning in
the latter part of 2011.

DFA's "intermediate" financial risk profile reflects the company's moderate
financial policies, including the subordination of member payments to debt
service payments (including both principal and interest). The company's
leverage, as measured by an adjusted debt-to-EBITDA ratio of about 1.6x for
the 12 months ended June 30, 2012, is stronger than the indicative ratios of
2x-3x for an intermediate financial risk profile. But cash flow coverage
measures are somewhat weaker than indicative ratios for the profile, with
funds from operations (FFO) to total debt of about 14% for the 12 months ended
June 30, 2012, as compared to indicative ratios of 30%-45%. We believe the
company has significant discretion over the timing of its member milk payments
to manage its cash flow generation. However, we estimate that the company's
proposed new debt financings and increase in debt levels will result in an
adjusted leverage ratio near or above 2.0x.

DFA's capital structure includes several series of trust-originated preferred
stock that have debt- and equity-like characteristics. Although we
analytically treat this type of preferred stock as 50% debt and 50% equity,
and the dividends as 50% interest and 50% dividends, in calculating credit
measures, the preferred stock's equity-like characteristics provide DFA with
some additional financial flexibility. The cooperative's balance sheet is
highly liquid, indicative of the perishable product that DFA handles. The
subordination of cooperative member payments to operating expenses and debt
service also provides a high degree of financial flexibility, thereby
supporting an intermediate financial risk assessment despite the weaker cash
flow coverage measures relative to indicative ratios for the intermediate
category.

Key assumptions in our 2012 forecast for DFA include:

-- Continued volatility in milk prices and commodity input costs. We use
USDA forecasts of total milk production and the all-milk price in our
assumptions.
-- Total sales declining by about 10%, reflecting in part lower milk
prices relative to 2011.
-- Gross margin near 3% and improving earnings from affiliates.
-- Capital expenditures near $50 million.

Liquidity
Our short-term rating on DFA is 'A-2', and we believe the company has adequate
liquidity in the near term, with sources of cash likely to exceed cash uses
for the next 12 months. Cash sources include nominal excess cash (as a
cooperative, the company redistributes a significant portion of its cash to
its member owners); a $500 million commercial paper program, backed by a $500
million revolving credit facility, which the company recently refinanced; and
positive cash flow from operations. At June 30, 2012, we estimate DFA had
about $20 million of cash on its balance sheet, about $214 million of
available borrowing capacity under its commercial paper program, and about
$482 million available to borrow under its revolving credit facility (after
deducting $18 million of letters of credit). The company retired $42 million
of debt in October 2012 and upcoming debt maturities include $155 million of
senior unsecured notes maturing in 2013. Other potential uses of cash relate
to outstanding litigation issues, capital expenditures, or relatively small
acquisitions.

The company's financial covenants include maximum leverage (debt to total
capital) and minimum fixed charge coverage tests. These covenants were
modified as part of the company's September 2012 credit facility refinancing
and we now believe they provide an expected greater-than-15% projected
covenant cushion.

Our assessment of DFA's liquidity profile also incorporates the following
expectations, assumptions and factors:

-- We expect cash flow sources will cover uses in excess of 1.2x for the
next 12 months.
-- We estimate that liquidity sources would continue to exceed uses even
if EBITDA were to decline by 15% from forecasted levels.
-- With its cash balances, availability under its revolving credit
facility, and flexibility in making certain cash member payments, we believe
the company could absorb (without refinancing) high-impact, low-probability
events.
-- In our view, the company has well-established relationships with banks
and a satisfactory standing in the credit markets.

Outlook
Our rating outlook on DFA is negative. We expect credit measures could weaken
somewhat over the near term with leverage potentially increasing to over 2.0x
following completion of the company's proposed new financings. We could
consider a lower rating if, as a result of total debt levels increasing or
operating performance deteriorating significantly, leverage increases to well
above 2.0x. We could consider revising the outlook back to stable if the
company successfully resolves its litigation issues and sustains leverage
below 2.0x while maintaining adequate liquidity and sufficient covenant
cushion.

Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Criteria For Rating The Global Branded Nondurable
Consumer Products Industry, April 28, 2011
-- 2008 Corporate Criteria: Our Rating Process, April 15, 2008

Ratings List
Rating Affirmed; Outlook Revised
To From
Dairy Farmers of America Inc.
Corporate credit rating BBB+/Negative/A-2 BBB+/Stable/A-2

Ratings Affirmed
Dairy Farmers of America Inc.
Commercial paper A-2
Preferred stock BBB-

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