What do the prices of cheese and butter in Chicago have to do with how much you pay for milk at Giant Eagle? Just about everything. And the result is that you're paying more for a gallon of milk than ever before.

After two years of record-low prices that forced some dairy farmers to thin herds and sell cows to the butcher, the store price in Pittsburgh this month jumped to an all-time high of $3.51 for a gallon of whole milk. It will go up again in June to $3.58 a gallon, another record.

The recent surge comes amid dramatically rising prices for butter and cheese on the Chicago Mercantile Exchange. Cheese shot up 41 percent from March to May, while butter went up by about 16 percent during the same period.

In part, the big increases can be blamed on popular high-protein, low-carb diets that have led farmers to slaughter dairy cattle to take advantage of higher beef prices. That in turn made milk less available and higher priced. (Also, a drop in milk production in Australia and New Zealand contributed to butter's increase.)

In Pennsylvania, minimum retail prices are set by the Milk Marketing Board, which figures in prices received by the farmer, along with the costs of processing, packaging and delivery to stores and the handling costs in the stores.

Since 2000, the federally established prices a farmer receives for milk produced have been based on prices at which cheese, butter and other commodities trade at the Chicago Mercantile Exchange. Before, they were based in part on complex price surveys in Wisconsin, Minnesota and other dairyland states.

"The government is much less involved now in setting the price of milk -- that's a big change. We're relying on the markets to set the price," said Ken Bailey, an associate professor of agriculture economics at Penn State University.

The Milk Marketing Board sets minimum prices at the farm and store for a range of milk products including standard whole milk, reduced-fat milk, flavored milk, buttermilk, and cream, in six separate regions of the state. The board does not set store prices for manufactured products such as ice cream, cheese and butter.

On average, the price of Class 1 milk -- the stuff consumers drink -- rose 19.7 percent in Pennsylvania from $2.95 per gallon in April to $3.53 in May. Dairy farmers are expected to receive $2.16 of that, the marketing board said. Similar price increases are being felt by stores around the country, with milk prices at their highest levels in years.

"Supply fluctuates from spurts of growth to periods of decline due to many factors, and then demand changes a little bit, too, so that's why prices are swinging from record lows to record highs," Bailey said. "It's not that farmers deserve lower or higher prices. It's just what the market dictates."

Bailey believes butter and milk prices will continue to rise this year, "but it can only go so high. At some point, consumers will say, 'I don't want to pay the price.' It's all working like it should, but, unfortunately, next year we're going to have too much milk."

The ups and downs of supply and demand can wreak havoc on farmers. That's why increasing numbers are forced to understand the arcane world of commodities trading and options, where prices for future delivery are estimated months and even years in advance and where they can hedge their bets somewhat to protect themselves from fluctuations.

But even that knowledge is guess work, with events outside farmers' control, from flooding to fad diets, causing expected prices and actual prices to differ wildly.

Charles Turner, Jr., president of Turner Dairy Farms in Penn Hills, said before this latest milk price surge, farmers suffered for about two years with prices that were below the cost of production.

"What happened is, they weren't investing in their herds and operations just because they couldn't afford it," Turner said. "They were taking money out of the bank instead of putting it in."

Turner's family-run dairy buys raw milk from 61 family farms in Western Pennsylvania.

Harold Shaulis, a dairy farmer and president of the Somerset Farm Bureau, estimated that farmers lost between $500 and $1,000 per cow last year because it cost that much more to produce milk than they received. Shaulis himself tends a herd of 75.

"Most farmers didn't have a whole lot of savings to begin with," Shaulis said. "The agricultural businesses have been our banks, carrying huge amounts of accounts receivable. It's been a challenge."

The number of milk cows in Pennsylvania fell 3.6 percent in the year ended in March, and the number of dairy farms in the state fell, too -- from 9,200 at the end of 2002 to about 9,000 at the end of 2003.

Now that milk prices have risen, surviving dairy farmers will be able to pay off creditors and make investments in their operations, though happier times aren't coming all that quickly.