"Eight dollars a gallon for milk, that's nuts," said Manoa resident Steve Lane.

Like many things sold in the Islands, milk goes for a premium because of the higher cost of doing business in Hawai'i. But unlike any other commodity, the price of milk is controlled by the state. It's not controlled to keep prices low as lawmakers have been attempting to do with a gasoline price cap. It's controlled to keep them high.

The state introduced a minimum milk price in the 1960s to help local producers survive competition from the Mainland and maintain a secure source of fresh milk in an emergency. The controls, however, are not preventing a decline in local milk production.

Milk production in Hawai'i dropped 23 percent between 1999 and 2003. On O'ahu the number of dairy farmers dipped from five in 1999 to three today. And one of those — Wai'anae's Evergreen Hillside Dairy — plans to close this month.

When local milk production drops, imports rise. Nearly half of the milk consumed in Honolulu is now imported from the Mainland compared with only 20 percent in 1999, according to the Department of Agriculture. That trend is likely to continue.

Milk price controls "aren't broken," said Randy Kamiya, milk specialist with the Department of Agriculture. "But they probably could use some improvements." Several aspects of the milk price controls are under review, Kamiya said, including the prices that Honolulu and Big Island farmers receive.

One thing that price controls have succeeded in doing is linking Hawai'i prices to those on the Mainland. So when prices rose on the Mainland last spring, they rose in Hawai'i.

Hawai'i farmers are guaranteed a premium of $1.05 per gallon of drinking milk over the price paid to their counterparts in California, Hawai'i's largest out-of-state provider.

That raised prices for the state's milk processors — Meadow Gold Dairies and Foremost Dairies. They, in turn, bumped up the price to retailers.

"That's the only reason" for higher prices on the shelves, said Roger Godfrey, president for Times Supermarkets, which has 12 stores on O'ahu. "It's not like we have a choice."

Some relief for consumers is coming because of recent price declines in California. Prices are off their peaks of last month and expected to drop further.

The rise in milk prices on the Mainland this year was the result of a convergence of factors that Meadow Gold spokeswoman Jackie Smythe called "the perfect storm." There was a shortage of milk-producing hormones, which are added to feed. Then the discovery of mad cow disease resulted in a ban on importing replacement cows from Canada. Also last year, Mainland milk producers instituted a program aimed at reducing production to lift prices.

Smythe said, "The good news is I think the effect of that perfect storm is finally passing."

Faced with rising wholesale prices for milk, store owners and processors said they did what they could to keep retail prices low.

While the price that Hawai'i consumers paid for milk went up 18 percent over an 18-month period ending last month, the price paid to farmers went by 81 cents per gallon. According to the Department of Agriculture, the retail price rose by 99 cents for the same period.

"We don't expect to make money on milk because that's a staple," said Clifford Tamura, chief executive for Tamura Superette in Wai'anae, where a gallon of Meadow Gold whole milk sold for $4.69 last week.

Some consumers respond to the rising milk prices by seeking out lower-priced brands.

"I like Foremost. I think it tastes better," said Jasmine Tavares of Waimanalo while shopping at Shima's Market recently. "Maybe they have happier cows. But if it's too high, I'll just get the cheapest (milk)."

Foremost and Meadow Gold milk sells at a premium while store brands typically sell for less, even though store-brand milk is often produced by the same Hawai'i dairies that supply the premium brands.

Very little milk is imported directly for sale. Instead Meadow Gold and Foremost import pasteurized milk, re-pasteurize and package it.

Big retailers such as Costco, Sam's Club and Wal-Mart use their large-volume sales to get low prices from Meadow Gold and Foremost. Smaller stores such as Tamura sometimes have low prices because of lower overhead and slimmer margins.

There are shoppers who say price isn't a factor.

"I didn't look at how much it cost," said Carlito Johnson after spending $3.98 on a half-gallon of 2 percent Meadow Gold milk at Shima's recently. "If I need it I buy it."

In general, rising prices don't crimp milk consumption, state specialist Kamiya said.

But one thing seems certain: Hawai'i milk consumers will be seeing less locally produced milk on store shelves.

Locally produced milk can be identified by the "Island Fresh" logo.

The drop in local milk production can be traced to low milk prices in previous years, importation of milk, and increasing costs for supplies such as feed and the expense of complying with environmental regulations, Kamiya said. Without price controls, even less milk would be produced locally, he added.

In addition, price controls don't guarantee profits for farmers, who likely lost money during part of 2003 and 2002 when prices were lower, Kamiya said.

Evergreen Hillside Dairy, which opened in 1992 in Wai'anae, is closing because of low prices in previous years, said owner Dave Kugel. In those years, Kugel lost money on the milk he sold to processors.

Processors such as Meadow Gold have to work around the price controls to minimize their costs. Meadow Gold, the state's biggest milk processor, looks first to the Big Island farmers and the Mainland where drinking milk is currently cheaper, Meadow Gold's Smythe said.

Big Island farmers, who produce about 7 percent of O'ahu's milk, are under a separate price formula that made their milk 85 cents per gallon cheaper than milk from O'ahu in June.

The state makes a distinction between higher-priced drinking milk, known as Class 1, and milk used in products such as cottage cheese and yogurt, known as Class 2. This encourages Meadow Gold and other dairies to buy drinking milk from outside the state or from the Big Island and buy cheaper Class 2 milk from O'ahu farmers.

In June, O'ahu farmers were paid only 96 cents per gallon for Class 2 milk, while their drinking milk sold for $2.88 a gallon.

Chin Lee, a dairy extension specialist at the University of Hawai'i College of Tropical Agriculture and Human Resources, said that because processors such as Meadow Gold will go for the lowest price, O'ahu farmers sometimes lose out.

Lee also said: "It makes no sense that we produce fluid milk and a substantial amount is used for Class 2 milk."

With or without price controls, Hawai'i milk production is likely to continue its decline. The state's livestock industry in general has been hurt by the aging of farmers whose children may not wish to continue farming, as well as a lack of access to reasonably priced, productive land available for long-term lease, Lee said.

For consumers like Lane, the main issue still seems to be finding good-quality milk at a reasonable price.

"I don't expect to pay $8 for milk even if it comes from my own back yard," he said.

Reach Sean Hao at shao@honoluluadvertiser.com or 525-8093.