Those cheap gallons of milk at the grocery store may lighten shoppers' moods in this bleak year, but it's been another story on the farm.

Paul Liebenstein, who milks 300 cows at his farm in Dundas, Minn., has lost more than $1,000 a day for much of the year. "It is a terrible year in dairy," he said.

A global crisis has been in full swing across the dairy industry for much of this year, with record low prices and a steep drop in demand ruining farms that just two years ago saw profits soar along with prices for milk and cheese. Dairy farmers here have slaughtered their herds, with at least 250,000 cows sent to meat plants in the past 15 months. In Europe farmers have protested by dumping milk.

Minnesota's $1.66 billion dairy industry is one of the state's largest agriculture sectors, but is shrinking as prices have collapsed. About 200 Minnesota dairy farms have closed in the past year, according to state figures, leaving 4,660 still operating.

Government help is on its way. On Thursday the Senate approved $350 million in emergency funding for dairy farmers as part of a $121 billion agricultural spending bill that President Obama is expected to sign soon.

Still, some in the industry have called for changes to the way dairy prices are set, and still others are hopeful the worst has passed since futures markets show prices rising in the months ahead.

Especially dispiriting to dairy farmers has been the reports of high profits from major milk processors such as Dean Foods of Dallas, the nation's largest milk retailer with brands such as Horizon. It reported profits of $64 million in its most recent quarter ended June 30, a 31 percent increase from a year earlier.

Farmers get about 30 cents of every dollar consumers spend on milk, said Jim Dickrell, editor of Dairy Today, an industry newsletter based in Monticello.

"When you look at fluid milk prices, consumers are getting a bargain right now," he said.

Indeed, a gallon of milk that might have cost nearly $4 in 2008 can cost less than half that today. This week Cub Foods had gallons of 1 percent at $1.78, as long as customers bought two.

High prices, more production

The price swing has everything to do with supply and demand, with the high prices that began in 2007 spurring farmers to produce a lot more milk. Then the recession hit, the export market dried up and a dairy industry raising more cows and producing more milk, cheese and butter was headed for a crash.

"It's kind of hard to just turn the cows off," said Bob Lefebvre, executive director of the Minnesota Milk Producers Association.

Meanwhile retail sales of milk dropped 13.2 percent, excluding Wal-Mart, in the past year despite an 11 percent drop in the average price for a gallon, according to Information Resources Inc., a market research firm in Chicago.

To some degree, it's the price of milk that's become unreliable: a chart of milk prices that goes back to the 1960s would show prices steadily rising or holding level until the late 1980s, when a new pattern began to emerge. Up one year, down the next. This decade has seen milk prices drop below $10 per hundred pounds (a standard measure used on dairy farms), rise to $16, fall to $10 again and then rise to $20 before falling again. The most recent price in Minnesota, $11.32 per hundred pounds, is less than the $15 that most farms would need to cover costs.

"To see those prices cut in half, it just was traumatic," said Gene Hugoson, the state's commissioner of agriculture. "This whole volatility thing is so tough. It can't correct itself."

Exports have been especially difficult to manage as the value of the dollar rose and fell, said Ed Welch, president and CEO of Associated Milk Producers Inc., a dairy co-op based in New Ulm, Minn., that with 3,500 members is one of the largest in the nation.

A weak dollar in 2007 drove exports like never before, said Welch, who saw 75 percent of his co-op's production of lactose, a sugar made from milk, exported at prices that neared $1 a pound. Today it sells for 20 cents a pound, he said. Similar drops for two other big export products -- whey and nonfat dry milk -- punished his farmers.

Making matters worse, industrial customers who tired of dairy's unpredictable price spikes began reformulating products so they no longer required dairy, using a plant sugar rather than lactose, for example, said Welch.

At a major dairy conference in Madison last weekend, farmers bemoaned what they saw as the latest threat: a new Cargill product made from plant starches that so thoroughly mimics the taste and texture of cheese, but at a fraction of the cost, that frozen pizza makers and fast food joints could drop mozzarella and cheddar altogether, their customers none the wiser.

"Cheese represents approximately 15 percent of a pizza recipe and given its high and fluctuating price, it can have a significant impact on the cost of frozen pizza production," said a news release from Cargill Texturizing Solutions offices in Belgium, where the product known as "Lygomme ACH Optimum functional system" was developed. Besides lower prices, Cargill's product offers a steady price, the company notes.

Federal help is coming

Whatever the future of frozen pizzas, another round of government support might stave off ruin for some farmers. The bill passed Thursday directs the government to buy $60 million of domestic dairy products and supply them to food shelves and nutrition programs. The remaining $290 million would go to some form of direct aid to farmers. The support follows other measures this year to stave off financial ruin, including an export subsidy program the USDA resurrected in May along with an agreement inked in March to buy and send to food shelves some 5 million pounds of butter and 194 million pounds of nonfat dry milk.

The industry is doing what it can to spur sales, including a new advertising blitz from the Midwest Dairy Association. The "Dairy Makes Sense" campaign begun earlier this year points out the health benefits of dairy, said spokeswoman Cindy Sorensen. That message, pushed through social media networks, Mom bloggers and radio spots planned for next month, is "sustainable regardless of pricing."

Farmers hope that the message takes and that profits return by the end of the year.

"Last year was the best year we've ever had, and this year will be our worst year," said Charles Krause, a dairy farmer near Buffalo, Minn. "We're eternally optimistic that it will get better."

Matt McKinney • 612-673-7329