The costs of seasonality and expansion in Ireland’s milk production and processing

Abstract

Ireland’s milk production sector relies on grass-based spring-calving systems, which facilitates cost advantages in milk production but entails a high degree of supply seasonality. Among other implications, this supply seasonality involves extra costs in the processing sector including elevated plant capacities and varying levels of resource utilisation throughout the year. If both the national raw milk production increased substantially (e.g. post-milk quota) and a high degree of seasonality persisted, extra processing capacities would be required to cope with peak supplies. Alternatively, existing capacities could be used more efficiently by distributing the milk volume more evenly during the year. In this analysis, an optimisation model was applied to analyse the costs and economies arising to an average Irish milk-processing business due to changes to the monthly distribution of milk deliveries and/or the total annual milk pool. Of the situations examined, changing from a seasonal supply prior to expansion to a smoother pattern combined with an increased milk pool emerged as the most beneficial option to the processor because both the processor’s gross surplus and the marginal producer milk price increased. In practice, it may however be the case that the extra costs arising to the producer from smoothing the milk intake distribution exceed the processor’s benefit. The interlinkages between the stages of the dairy supply chain mean that nationally, the seasonality trade-offs are complex and equivocal. Moreover, the prospective financial implications of such strategies will be dependent on the evolving and uncertain nature of international dairy markets in the post-quota environment.