Raw milk prices reached new record lows in the past year, leading some processors to post record-high profits.

Raw milk prices reached new record lows in the past year, leading some processors to post record-high profits. But this boom-and-bust cycle undermines the long-term survival of the dairy industry, an issue that needs to once and for all be addressed in a substantive manner, not just with more artificial price manipulation.

Total milk production in 2008 was 190 billion pounds, an increase of 2% over 2007, according to USDA statistics. The agency projects we’ll finish 2009 with 188.4 billion pounds, a decrease of just under 1%, a trend that’s expected to continue into next year, when the USDA predicts production will drop below 187 billion pounds.

And in just one year, the price of raw milk has swung from $18.63/cwt, in the third quarter of 2008, to $11.70 for the same period this year, up a dime from the second quarter. The USDA projects this price to continue to rise gradually, top $12 by year’s end and surpass $14 by mid-2010.

But will it be enough to repair the damage already done? True, the bulk of this magazine’s readership benefits when milk prices are low – but they can’t forever. Dairy farmers have been culling herds in record numbers or shutting down altogether, hamstrung by archaic government policy that doesn’t allow dairymen to simply ask their customers to pay them for their cost of production plus a fair profit. Processors can raise product prices as high as they dare to cover their increasing costs, but if the farmers vanish, there will be nothing left to process.

The $350 million that Congress recently approved to aid dairy farmers is just the latest patch on a tattered policy. Producers and processors need to stand on a level playing field to work out the best deal for long-term sustainability of this industry. Otherwise, both sides might not survive another economic downturn like we’ve had in the past year.

As it is, the industry has been squeaking by, even in historically recession-proof categories like ice cream. The USDA reported production of ice cream and other frozen desserts and novelties were down about 2% in 2008, to 1.54 billion gallons. IRI reported a sales increase of less than 1% for the year ending Aug. 9; units sold were up almost 3%.

Total cheese production in 2008 was up 1.6% to nearly 10 billion pounds (Wisconsin still in the lead with a quarter of all output), according to the USDA. IRI pegs sales of natural cheese for the past year at nearly $7.8 billion, up 5.4%. As folks have been eating out less often, cheese manufacturers have been compensating for drops in foodservice business by paying more attention to areas like cheese for frozen pizzas and other products for home use.

Yogurt production was up 3.5% to almost 3.6 billion pounds in 2008, the USDA reports, while sales were up almost as much, surpassing $3.8 billion, according to IRI. The USDA reports butter production rose 7.3% to 1.6 billion pounds; IRI says butter sales grew by less than a percent to almost $1.3 billion.

Processors express confidence that penny-pinching consumers will choose to invest their grocery dollars in dairy products because of their rich nutritional value. But shoppers are also opting for private label products in greater numbers.

And as this issue was in production, Grupo Lala upped the ante in the U.S. market by acquiring New Jersey-based Farmland Dairies. This deal, along with Lala’s earlier acquisition of National Dairy (together the year’s biggest industry news), gives the Mexican dairy giant a foothold in nearly every key U.S. market, positioning it to do battle with the likes of Dean Foods, HP Hood and Prairie Farms. It’s also a show of confidence in the strength of the U.S. dairy market.

Meanwhile, the global market continues to present both challenges and opportunities for U.S. manufacturers, if they’re willing to do the legwork.

More details are waiting for you in this month’s State of the Industry report. We hope it becomes your guidebook for the journey ahead.

James Dudlicek, chief editor of Dairy Foods, can be reached at 847/405-4009 or dudlicekj@dairyfoods.com.