The USDA's Agricultural Research Service recently published a study called "Putting Dairy Cows Out to Pasture--An Environmental Plus" that concluded just what the title suggests: it's better for the environment, as measured by greenhouse gas emissions, fuel use, carbon footprint, and maintenance of water quality. They do produce less milk overall compared to conventionally-raised, corn-fed cows. Marian Burros summarizes the key findings in this article at Rodale.
It's nice to see the government taking a serious, scientific look at sustainable agriculture. And I think it is indicative of a growing trend of taking sustainable agriculture and grass-fed animals seriously. Go grass!