In China, the cows are badly malnourished, and the routine spiking of dairy products with melamine and other illegal substances has been an "open secret" for years, says the Wall Street Journal today in a detailed look at the dairy system there. At the root of the problem is a dairy industry rife with farmers who have no idea how to feed or care for their cows, and even if they do, would always choose the cheapest possible option; whether feeding them with straw instead of corn, or (it seems obvious) allowing them enough room to graze naturally.

That melamine should be added to milk is only the most deadly in a string of unethical practices, starting with ill-treatment of animals and continuing through routine addition of "protein powder," a nutrient-booster made of animal parts, soy, and other ingredients. This powder was added, not to contribute to the health of the customer, but instead to fool inspectors.

It wasn't foolish enough; inspectors learned to identify the additions, as well as the "fresh-keeping liquid" of preservatives and antiobiotics. Were the farmers upset about their lack of ethics? No, they were just concerned the milk would be returned to them and be "wasted." Enter melamine.

Melamine, a scrap byproduct of many Chinese factories, mimics protein in lab tests. And it is extremely cheap.

Oil's at a record peak, transportation costs are going higher, and grocery prices are increasing. But there's a great white hope for fans of frozen yogurt, Gorgonzola, and chocolate malts, as dairy prices are supposed to stay relatively steady or even fall in 2008.

The U.S. Department of Agriculture noted that while milk prices jumped 12% in 2007, they will be under control this year thanks to a 1.1% increase in the cow population and a 1.7% boost in the average output per cow. Overall milk production is expected to rise 2.7% in 2008, faster than the 2.1% growth seen last year.

Declines in wholesale milk prices trickle down to the consumer and could shave off prices on the retail end for bottled milk. Ephraim Liebtag, an economist with the USDA's Economic Research Service, told CNN/Money that the overall price tag for dairy goods (including cheese, butter, and yogurt) is expected to rise 3% this year, slower than last year's 7.5% hike in overall dairy products. This modest advance would be relatively good news for American consumers, who are budgeting for a 4% hike in food purchased in the stores or at restaurants.

Shares of Cheesecake Factory Inc (NASDAQ: CAKE) fell more than 7% today after management lowered its second quarter earnings guidance, citing industry-wide softness and higher dairy costs. The company forecast second quarter revenue would increase 14.5% to 15.5% and quarterly margins would be down 1% year-over-year.

Earlier today, Bear Stearns downgraded shares of Cheesecake Factory to Peer Perform from Outperform on the news. Bear Stearns expected Cheesecake to show revenue growth of 16-17%, or 34c per share. CIBC World Markets followed suit and downgraded shares to Sector Perform from Outperform on the news.

Raymond James cut shares to Outperform from Strong Buy, expecting shares of the restaurant to trade lower in the near-term. The analyst still considered Cheesecake a good long-term buy, given the likelihood that dairy prices will retreat in time.

I am continually fascinated with those scientists in New Zealand. It seems they'll let nothing hold them back in their relentless pursuit to improve the world. This time they've really amazed me though with their announcement that they have finally bred a cow which produces "skim" milk. Officials at the biotech firm ViaLactia have visions of low-fat milk-producing dairy herds dancing in their heads.

When speaking about their newly isolated low-fat cow, ViaLactia's chief scientist Russell Snell said, "she produces a normal level of protein in her milk but substantially less fat, and the fat she does produce has much more unsaturated fat," Snell said. "She also produces milk with very high levels of omega3 oils." Additionally, the firm claims that they have determined that the low fat traits can be passed on to the cow's offspring.

It's taken nearly six years for the company to determine that this trait is actually carried in the cow's genetic construction and not a simple anomaly. Scientists needed to have the significant cow bred, have her produce female offspring, raise that female offspring to breeding age and the "freshen" her (bring her to milk production) through her own breeding. After all that was done, scientists were then able to test the newly freshened cow's milk to determine that it indeed was as significant as her mother's.

Soon we may very well be seeing cows wearing running shoes and head bands as the new age of dairy begins to dawn. Milk which is naturally low in fat yet contains all the nutritional value of the previous generations is surely going to gather some major attention. In the mean time, I recommend that you keep a watchful eye turned towards New Zealand. It seems to me that the scientific community over there has some real bright stars working for them.

Starbucks Corporation (NASDAQ:SBUX) doesn't break its expenses out by food group, but if it did, "dairy" would certainly be on the top of the list. It may be a coffee company, but milk makes up a large percentage of most of its beverages.

Since the company has switched to trans-fat free pastries, the next item on its list of consumer health phobias: hormones in milk. Artifical growth hormones fed to cows improve milk production; naturally, their use is rife with controversy. Some activists blame artificial growth hormones, known as rBGH, for a wide number of public health problems, from early onset of puberty for girls to interference with a woman's healthy pregnancy.

Starbucks, not one to sit on the sidelines of a potential PR benefit, has announced that all its U.S. stores will switch to rBGH-free dairy products (milk, half-and-half, whipped cream and egg nog). The company hasn't noted when this changeover will occur, although a spokesman said that the percentage of hormone-free milk had gone up from 27% to 37% since the end of 2006.

Sure, ten percentage points in two weeks is a huge jump; but with 63% of the company's dairy products left to go -- and no way to know whether your local shop is hormone-free without raiding its fridge -- activists are reserving their celebrations. And no patting Starbucks management on the back for being proactive. The company has been targeted by the Food and Water Watch, among others, in a campaign to eliminate hormones for several months.