Nov. 2--Milk prices, which saw a dramatic slump last year that was accelerated by the tanking economy, are on the way back up.

The price for a gallon of milk could be as much as 20 cents higher by Christmas, a USDA economist said Monday.

"Milk production is coming down and demand is starting to improve," said Larry Salathe, senior economist with the U.S. Department of Agriculture. "The market is tightening both on the demand side and on the supply side."

The benchmark pricing measure -- called the Class 1 mover -- is starting to head north, after being stable, at low levels for most of the year, Gregg Engles, chairman and chief executive of Dean Foods Co., told analysts Monday.

Salathe said that benchmark is based in part on the wholesale price for cheese, butter and nonfat dry milk "and those prices are moving higher."

Engles' observations on milk prices came as the nation's largest dairy producer reported third-quarter earnings that gained more than 30 percent from a year ago.

Net income for the third quarter, which ended Sept. 30, was $49.7 million, or 27 cents a share, up from $37.8 million, or 24 cents, a year earlier.

Sales slid 13 percent, to $2.8 billion, in part due to lower sales volumes at the company's WhiteWave-Morningstar operations.

USDA data shows prices for a gallon of 2 percent milk in Dallas have held steady from July through Oct at $2.32 a gallon. But Salathe said the price processors pay for milk is up 24 cents a gallon since the summer.

He expects October figures from the Bureau of Labor Statistics, used to calculate the consumer price index, to show early signs of the increased costs.

How much of that gets pass along to consumers varies by chain.

Grocery chains often use low-priced milk to lure consumers. And Engles said Dean will use part of the money it saved in making cuts throughout its operation to "improve the consumer value" of its products, i.e., keep a lid on price hikes.

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