I am a beef man, not a dairy man so I had to go look up a few things. First the concentration of dairies is in the West and while the total number of dairies has shrunk the number of cows per herd has dramatically increased. the traditional milk belt of the midwest and Pa, NY has many more but much smaller dairies.
I would hazard many factors figure into why the smaller dairies are closing down. First is reliable, cheap labor. Many older/smaller dairies of the midwest/PA/NY regions relied on family to do the labor. Families are no longer stairstepped out to provide a constant source of labor. A local dairy in Elgin, OK ceased production due to a lack of kids.
Price supports for dairies are trending downward outside the farm bill. Much of our 'other than fluid milk' products rely on export. The International trade agreements curb the amount of support the government can give in exports. Many traditional importers of US dry/butter product have started domestic production, Russia and the Former Iron Curtain nations come to mind. Russia used to import large amounts of our butter, not so much anymore.
feed costs in California have far more to do with rain than ethanol. Strong multi-year droughts have hurt the production of not only corn but the #1 feed in dairies- silage. Bottomline to feed dairy cows at a level to obtain profitable returns irrigation of crops is a must. In California competition for water with urban centers and the other western states is growing fiercer. Iowa has had two bad years due to drought. Water for crop production is a nasty debate here in Texoma as we have had a few rough drought years as well. (having record heat ain't helping us much either)
Americans have been trending downward or flat in their consumption of dairy products.
So all in all I'd say ethanol MAY be a factor but damn sure not THE factor. it is incredibly demanding work,(is why I have beef cattle
the export programs are losing funding, the smaller dairies leaving as huge dairies increase along with the use of controversial hormones pick up the slack. Water shortages for production of silage and grain crops- don't forget soybeans are a key feed ingredient- and a downward trend in domestic consumption all figure into the dairy industry.