Dairy Farmers: stable performance amid volatility

by Josh Sosland
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NEW YORK — In a “volatile pricing environment,” the relatively stable operating performance of Dairy Farmers of America has prompted a credit ratings upgrade from Moody’s Investors Service.

The ratings agency on May 29 said it has upgraded the dairy cooperative’s unsecured rating to Baa1 from Baa2 while affirming its Prime-2 short-term rating. Moody’s also upgraded the rating of trust preferred securities of guaranteed D.F.A. subsidiaries to Baa2 and preferred stock to Baa3 from Ba1.

“The upgrade to Baa1 reflects the cooperative's strong credit metrics and its relatively stable operating performance in a volatile pricing environment,” said Nancy Meadows, a senior analyst at Moody’s.

Moody’s acknowledged uncertainty at D.F.A. surrounding outstanding litigation, but the agency said the cooperative’s credit metrics are such that it can withstand ongoing legal costs.

“Moody’s views D.F.A. as well positioned for the Baa1 rating category and that the cooperative will continue to manage milk price volatility given its scale, liquidity and significant network of owned and affiliated bottlers and dairy product manufacturers,” Moody’s said. “The ratings also benefit from the cooperative structure, which provides important financial flexibility that, in a stress scenario and on an infrequent basis, would allow it to quickly improve its cash flow through adjustments in its milk payments.”

D.F.A. currently has $155 million of unsecured debt and $150 million of preferred stock as well as $218 million of trust preferred securities.

Against the upbeat backdrop, Moody’s said a further upgrade was unlikely in the near term. Offering metrics that would justify such a move, the agency identified cash flow to net debt above 30% and co-op debt to EBITDA of less than two times for a sustained period.

“Other considerations that could contribute to an upgrade would be D.F.A. successfully and prudently managing its expansion into export markets and the resolution of outstanding litigation,” Moody’s said. “Ratings could be downgraded if DFA experiences significant earnings deterioration in its value-added businesses or a shift in industry fundamentals that weakens D.F.A.’s core business model.”

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