Higher prices may threaten consumption, but product development continues — especially in the wellness arena.

We’ve seen the headlines all year, most of them variations on a common theme: “Why are milk prices high?”

The pundits can argue the matter to death, but the reasons are basic: upswing in demand for dairy products in the first quarter without an equal rise in production, high corn prices that have led producers to cut back on production, and an increased global demand for U.S. dairy products — oh, and also the rising energy costs that trickle down into so many nooks and crannies of doing business in this $90 billion industry.

So here we sit, in the middle of the third quarter, with a $21.70/cwt all-milk price, according to the latest USDA forecast that predicts a slide to $21.15 by the fourth quarter. That’s up from $15 at the beginning of the year.

Such dire straits for dairy led Irene Rosenfeld, chief executive officer of No. 2 processor Kraft, to warn of a slowdown in milk consumption, telling the Financial Times that this year’s record-high dairy prices will drive more and more consumers away from the category. To be sure, Kraft and others have boosted prices to offset production costs.

Will higher prices really drive folks away? The fluid side has the most to worry about, as studies have shown consumers are more likely to cut back on their commodity white gallons when prices climb.

But what about all the new specialty products — the fancy cheeses, the functional yogurts, the dairy-based foods spiked with the latest new wellness ingredients?

Data presented by a major ingredient supplier at this year’s IDFA Cultured Products Conference indicates that consumers will pay top dollar for dairy products that deliver added value, be it omega-3s, cholesterol-reducing plant sterols or an oil emulsion that curbs your appetite.

And if the folks we interviewed for our State of the Industry report this year are to be believed (and we have no reason to think otherwise), good things lay ahead for dairy.

Though market data doesn’t paint the rosiest of pictures for the fluid segment, processors are optimistic that a renewed recognition of milk’s role in wellness will bring the boost needed to effectively push back against sugary sodas and juices.

American consumers continue to have an insatiable appetite for cheese, especially convenience formats like slices and shreds.

Yogurt — the category with perhaps the greatest healthy halo — continues to do well, and new products continue to hit the market with cutting-edge fortifications. That halo appears to be extending to frozen yogurt as well, a category that’s experiencing its best growth in years.

However, the wellness wagon appears to wear out its welcome when it comes to ice cream, as sales of low-fat and fat-free varieties plummeted this year compared to last. Despite the success of the various “churned” products, consumers apparently prefer to invest their ice cream calories in the so-called “good stuff.”

Organic continues to be a strong sector within dairy, with higher prices for conventional milk putting organic products within closer reach of many consumers’ pocketbooks. Organic prices have stabilized — and in some cases dropped — due to a glut in production caused by farmers taking advantage of one final year of the 80/20 feed requirement. Hundreds of new farms have been converting to organic, creating a tidal wave of milk that has not only helped organic processors meet their fluid demands, but allowed many to develop new organic cheeses, butters and cultured products as well.

So where do we go from here? The USDA’s July report predicts high milk and dairy product prices and lower-than-expected feed prices will boost production enough this year to limit further price increases. The agency further suggests that prices could ease slightly in 2008, projecting a first-quarter all-milk price of $19.50/cwt.

Milk production in 2008 is forecast at 188.4 billion pounds, up 2.2 percent from the 2007 expected total, according to the USDA, indicating a return to growth that is closer to trend.

Activity among processors this year seems to indicate that high prices are not going to stop shrewd dairy innovators and marketers from figuring out new ways to get more milk into more households.

In all, more than 1,100 new dairy products have been launched in North America this year between January and July, according to Mintel’s Global New Products Database. That’s not an indication that the industry expects its consumers to turn tail and run.

It means the industry has been busy developing new products that it knows consumers will pay good money to buy, whether it’s for taste, wellness or convenience.

As our friends in the juice business might say, when life gives you lemons, make lemonade.