How’s the dairy foods business? Which one? If you sell natural cheese or Greek yogurt, then the answer is: Great. If you bottle milk or package ice cream, then the answer might be: Things could be better.

Our annual State of the Industry report, beginning on page 24, is a category-by-category review of dairy foods and beverages. The Dairy Foods editorial staff and contributors analyzed sales data from SymphonyIRI Group, Chicago, and interviewed more than two dozen processors and analysts to get their take on the dairy processing industry. After digesting all this information, associate editor Sarah Kennedy and I assigned letter grades to each category. While none failed, some got by with a “gentleman’s C” or C minus. Others earned a gold star for their efforts.

As Ellen Schmitz of SymphonyIRI Group writes in the introduction, milk, cheese, butter and yogurt are four of the 10 items in every shopper’s basket. These are essential foods. Ice cream and sherbet are the second-most popular items in the frozen aisle. As a whole, unit sales are flat but dollar volume is up because of inflation. It would be better for the industry if dollar volume increased because shoppers were buying more items. Processors have some work to do. Here is my brief summary of each category.

Milk.The stakes are high in this $11.5 billion category. Processors are being creative in trying to dam the steady drip-drip-drip of annual losses. On the one hand, they are going with larger packages, like 96-ounce jugs. On the other, they are downsizing to pint bottles to capture the grab-and-go consumer. Processors sell flavors for a limited time, much like ice cream manufacturers do. And milk processors create niche formulas by adding functional ingredients, including calcium, omega-3s, vitamins and fiber. Chocolate milk is positioned as a recovery beverage, an alternative to sports drinks. The industry encourages moms to serve milk to their children at breakfast. Mom is encouraged to drink her milk in a latte. As you can see, milk processors are working on many fronts to reverse the trends in milk consumption.

Cheese. Natural cheese outshines processed cheese. Cheesemakers are innovating with bold flavors, like cinnamon and chocolate. They are blending cheeses into new combinations. In these days of heightened awareness of health and nutrition, cheesemakers slice cheese ever thinner, their answer to portion control. Artisanal cheesemakers are riding the twin waves churned up by foodies and locavores. These consumers appreciate finer foods and are paying for higher quality.

Cultured dairy. Yogurt sales (including frozen products and smoothies) are up 7.5%, according to Mintel, a Chicago-based market research firm. Greek yogurt is pulling the category, yet it is taking share from conventional yogurts. The Greeks are not bringing new customers to the category, apparently. That needs to be corrected.

Chobani and Dannon are two yogurt processors that have opened retail stores in New York City. Undoubtedly, this will give them insights into preferences or flavors and combinations.

Elsewhere in the cultured dairy category, the top brand of sour cream is gaining sales. Sour cream plays well with others; it is used as an ingredient in dips and baked goods. Dairy processors are dressing up plain old cottage cheese with fruit inclusions.

Ice Cream. Sales of packaged ice cream and novelties have dropped but those of frozen yogurt have increased. Like milk, ice cream is a product for the young. The population is aging, so the long-term prospects for ice cream are dim. Processors are creating new flavors all the time, especially those inspired by cookies and cakes. To appeal to younger consumers, they make sour green apple and cotton candy flavored novelties. Coconut is another popular flavor.

One dairy processor has developed a nutrition-packed dessert with high levels of fiber, protein, vitamins and minerals. It doesn’t meet the standard of identity for ice cream because of its low butterfat content and other ingredients, so it is sold as a frozen dairy dessert.

Butter. Foodies have rediscovered butter and butter processors have obliged with higher-fat, European-style versions. Manufacturers add herbs and spices to butter to create a flavoring that home chefs use in preparing chicken, fish or pork entrees. Brands use Facebook to promote the use of butter in baking and in other recipes. Overall, unit sales of butter have risen 5.5%.

Nondairy beverages. Sales of bottled water are less than half those of fluid milk, but they are rising. So are sales of teas and coffees. Refrigerated juices and their shelf-stable cousins have seen sales decline. The zero-calorie, no-sugar-added label of water certainly appeals to some consumers. Seemingly every week there is a study showing long-term health benefits of drinking tea or coffee. Consumers are on high alert when it comes to sweeteners. Processors are advised to choose wisely.

This just scratches the surface of the state of the dairy industry at the close of 2012. I invite you to read our complete 32-page series. If you reach different conclusions than I did, tell me. You can share your opinions as a guest blogger on