Dairy Farmers of America has agreed to divest its interest in Southern Belle Dairy Co. to conclude a three-year legal fight with the federal government.

Dairy Farmers of America will sell its interest in the Kentucky dairy to Prairie Farms Dairy Inc. under an agreement approved by the Department of Justice. The settlement will restore competition in the bidding for school-milk contracts in eastern Kentucky and Tennessee, the Justice Department said last month.

Also selling its interest in Southern Belle to Prairie Farms is Dairy Farmers of America's partner, the Allen Family Limited Partnership.

The dispute began in 2003 when the federal government sued Dairy Farmers of America over its 2002 acquisition of a 50% interest in Southern Belle in Somerset, Ky. That purchase followed Dairy Farmers of America's earlier acquisition of a 50% interest in National Dairy Holdings, which owns Flav-O-Rich Dairy of London, Ky.