Pamela Ferdinand, Special to The Washington Post

ENOSBURG FALLS, Vt.

This was not the place for the lactose intolerant.

Free school lunch-sized cartons of Vermont-made milk and containers of yogurt. Ice cream cones at the Udder Delight. A cow hand-milking contest for kids, and "Got Milk?" stickers plastering foreheads and fast-food stands alike.

The 47th Annual Vermont Dairy Festival recently celebrated the bovine bounty of the Green Mountain state in this remote rural village near the Canadian border. But many dairy farmers here and elsewhere have little to cheer.

As many as 200 Vermont dairy farms could go out of business this year, according to state officials, as the dairy industry nationwide suffers through one of its worst crises since the Great Depression. Milk prices have plummeted to 25-year lows, while production costs have increased and demand has weakened.

Dairy farmer Ed McGarry of West Berkshire, said he has put off replacing equipment and making improvements. Bob Foster, who milks 320 cows in Middlebury, wondered how he is going to pay the next creditor. Jeff Senesac of Colchester simply auctioned off his herd, ending four generations of Senesacs in the Vermont dairy trade.

"The milk price is so up and down. It always seemed like we were just about to get caught up, and we'd get in debt again," said Senesac, a 36-year-old married father of two. "I just can't see farming until I've got nothing left."

Nationwide, the depressed milk price has revived talk of regional price support systems and prompted calls for an investigation into the large gap between what farmers earn and consumers pay. Despite severe budgetary restraints, some state legislatures, including those in Maine and Vermont, are providing loans and grants to dairy farmers to keep them afloat. And a coalition of dairy cooperatives organized by the National Milk Producers Federation is trying to launch the first nationwide voluntary effort to reduce milk supplies by increasing exports and retiring herds.

In New England, the demise nearly two years ago of the Northeast Interstate Dairy Compact, which guaranteed a minimum milk price, has put added pressure on many dairy farms that face higher land and labor costs than farms elsewhere in the country. Some farmers canceled planting spring crops to conserve money to maintain their dairy herds, while others who are reluctant to assume more debt have sold off land and cattle.

"It's a severe crisis for farmers and not only for farmers but for the whole rural community because they are not able to pay their bills," said Robert D. Wellington, chief economist with Agri-Mark Inc., a Massachusetts-based dairy farm cooperative.

In recent decades, the number of farms has dramatically declined and shifted westward, particularly to California, where larger, more specialized and industrialized operations can produce more milk with fewer cows. The average price for milk has recently hovered around $ 11 per 100 pounds or "hundredweight," although a University of Maine study estimated it costs at least nearly $ 17 to produce that amount.

Until it expired at the end of September 2001, the Northeast Interstate Dairy Compact set a minimum price in six states for Class 1 milk, which is most of the milk produced and consumed in New England.

When prices remained above the minimum, which some analysts say occurred about one-third of the time, nothing happened. But when the price fell below that amount, dairy processors paid the difference, which totaled $ 146 million over four years.

After the compact expired, Congress enacted the Milk Income Loss Contract, which uses a slightly different formula to provide payments to dairy farmers on a nationwide basis, retroactive to December 2001.

Many farmers praise their monthly check as a critical cushion against low milk prices. But others chafe at the notion that the program is taxpayer-funded to the tune of almost $ 1.5 billion so far, rather than industry-supported and that it has failed to stanch the oversupply of milk. Unlike the compact, the contract program also forces farmers to speculate about market prices -- adding to their uncertainty -- and limits subsidies in ways that farmers complain penalizes large and medium-sized farms.

For New England farmers such as Bob Foster of Middlebury, Vt., the federal money has provided some small relief. It helped him prepare for winter and kept some of his neighbors in business, he says. But by comparison, Foster says he would have received $ 25,000 in additional funds under the compact during the same price conditions.

"We're borrowing on short-term credit.We're stretching out payments with those bills we can. It's not fun," said Foster, 57. "Right now, it's a volatile situation, and it brings into question whether the next generation will want to participate in dairy farming or not."

Concern for the future of dairy farming and the preservation of farmland is intensifying across New England, where dairy farming is the largest agricultural sector, although it produces only about 3 percent of the national milk supply. Ten dairy farms have gone out of business in New Hampshire in the past six months, about half because of low milk prices, state officials say, and farmers are reportedly receiving letters from developers encouraging them to sell their land.

In November, a group of Maine dairy farmers dumped thousands of gallons of milk into a manure pit to protest how little farmers are being paid for their milk. Maine lost 31 dairy farms last year, and state officials now estimate that as many as 100 Maine dairy farmers -- a full quarter of the entire industry in that state -- could go out of business this year.

Maine Gov. John E. Baldacci (D) formed a 20-member dairy task force that is expected to issue a report by November. Even with a billion-dollar shortfall in the state budget, Maine legislators also came up with $ 7 million in monthly grants to dairy farmers based on their production.

"You have a cow that is going to be making milk every day, so you can't say, 'Don't make milk.' Unless you want to slaughter the herd or sell it off, which is not always the economical thing to do, you produce the milk and take the losses," said Richard Davies, a senior agriculture policy adviser to Baldacci. "They just keep hoping that the milk prices are going to go back up. It is a desperate situation for a lot of them."

The stakes also are high in Vermont, where most of the New England's dairy farmers are located. An estimated 44 dairy farms went out of business last year, and 17 have failed in the past six months out of roughly 1,400 dairy farms statewide. In a sign of the times, Gov. Jim Douglas (R) recently elevated the state department of agriculture to a Cabinet-level agency. Vermont has paid out $ 5 million to dairy farms as part of a new relief effort that includes low-interest loan and deferred debt programs, said Agriculture Secretary Stephen Kerr. In addition, more than 300 dairy farmers, representing about one-third of the milk produced in Vermont, have joined forces to try to collectively bargain with processors for higher milk prices. They also are considering purchasing their own processing plant -- an expensive, and, some say, unrealistic proposition.

For Gary Underwood and other farmers who barely have enough money now to get by, entrepreneurial investment is a tough sell.

"I cut back here; I cut back there. There's machinery I'd like to buy, but I just fix the old stuff," said Underwood, 53, who has nearly $ 180,000 in debt. "I lose money every day."