The price schedule required to smooth seasonal milk supply
Develops a method for estimating the monthly milk price schedule needed to counter the effects of seasonality, which is an enduring feature of milk production in the UK. The issue of seasonality has been mostly ignored in studies estimating milk supply functions. In this paper milk supply functions which explicitly take account of seasonality are estimated for Northern Ireland and Scotland. Pre-testing of monthly milk price and milk supply time-series, using an extended HEGY test and an ADF test, indicated the presence of deterministic seasonality. Empirical milk supply models incorporating seasonal dummy variables to account for deterministic seasonality were estimated in the two regions of study. The results of these models were used to calculate the monthly producer milk price schedule required to encourage dairy farmers to produce an even monthly milk supply pattern. These calculations indicated that, in the long run, a peak-to-trough seasonal price differential of around 8 pence per litre would be required to produce an even pattern of milk supply in Scotland, and 11 pence per litre would be required in Northern Ireland.