Kilmer, Richard L.

Muhammad, Andrew

Weldon, Richard N.

English

Research Papers in Economics

  1
 
 
 
 
 
PBTC 02-6
 
REDUCING SEASONALITY IN DAIRY PRODUCTION 
 
By 
 
 
Richard N. Weldon, Andrew A. Muhammed, & Richard L. Kilmer 
 
 
PBTC  03-10           September  2003
POLICY BRIEF SERIES 
PBTC 03-10   2
INTERNATIONAL AGRICULTURAL TRADE AND POLICY CENTER 
 
MISSION AND SCOPE: The International Agricultural Trade and Policy Center 
(IATPC) was established in 1990 in the Food and Resource Economics Department 
(FRED) of the Institute of Food and Agricultural Sciences (IFAS) at the University of 
Florida. Its mission is to provide information, education, and research directed to 
immediate and long-term enhancement and sustainability of international trade and 
natural resource use. Its scope includes not only trade and related policy issues, but also 
agricultural, rural, resource, environmental, food, state, national and international 
policies, regulations, and issues that influence trade and development. 
 
OBJECTIVES: 
 
 The Center’s objectives are to: 
 
•  Serve as a university-wide focal point and resource base for research on 
international agricultural trade and trade policy issues 
•  Facilitate dissemination of agricultural trade related research results and 
publications 
•  Encourage interaction between researchers, business and industry groups, 
state and federal agencies, and policymakers in the examination and 
discussion of agricultural trade policy questions 
•  Provide support to initiatives that enable a better understanding of trade and 
policy issues that impact the competitiveness of Florida and southeastern 
agriculture specialty crops and livestock in the U.S. and international markets   3
 
 
 
 
Reducing Seasonality in Dairy Production 
 
 
 
By 
 
 
 
 
Richard N. Weldon, Associate Professor, Department of Food and Resource Economics, 
University of Florida 
 
Andrew A. Muhammad, Assistant Professor, Department of Economics,  
Southern University 
 
Richard L. Kilmer, Professor, Department of Food and Resource Economics, 
University of Florida 
 
   4
 
Since the passage of the Capper-Volstead Act and the Cooperative Marketing Act in the 
early 19
th century, farmers in the U.S. have used cooperatives to purchase inputs and 
market their products.  Individual producers benefit from cooperatives that operate at cost 
to provide cheaper inputs and services.  Marketing cooperatives also provide producers 
with potentially higher prices and access to markets.  The consumer also benefits when 
the cooperative provides a more efficient market, economies of size, and/or market 
coordination. 
 
The vast majority of the milk produced in the U.S. moves through dairy cooperatives.  
These cooperatives, in conjunction with federal marketing orders, have attempted from 
time to time, by implementing seasonal pricing plans, to minimize the variability of 
seasonal and yearly milk production and provide consumers with a stable and fresh 
supply of fluid milk and dairy products.  However, in spite of these attempts, U.S. dairy 
marketing cooperatives in general, and the Florida cooperatives in particular, continue to 
struggle with seasonal supply and demand disequilibriums.   This inefficiency is 
expensive to both the producer and the consumer. 
 
Florida 
 
Florida milk production varies throughout the year.  Moderate temperatures in the spring 
help to promote monthly production at levels 15 percent above the monthly average 
while summer heat contributes to production levels 17 percent below the monthly 
average (Figure 1).  At the same time, demand for milk varies seasonally due to school 
lunch programs and tourism.  Consequently, even though annual production and annual 
consumption may be similar, these seasonal patterns result in monthly supply and 
demand imbalances.  Florida dairy cooperatives must export bulk fluid milk early in the 
year and then turn around a few months or even weeks later and import milk.  Due to the 
nature of "full supply" contracts with milk processors, Florida dairy cooperatives incur 
transportation costs for both the importing and exporting of fluid milk. 
 
Given the size and type of market, little, if anything, can be done to bring consumption or 
demand into synch with production.  A more likely course of action would be to bring 
production in line with consumption by reducing seasonal production.  The problem of 
output coordination with the changes in seasonal demand could be dealt with by using 
production controls (quotas) or with price incentives.  Numerous issues, such as 
implementation and administration as well as the likelihood of capitalization of benefits 
into the quotas, preclude the use of production controls.  The more likely course of action 
would be the use of price incentives.   5
 
In January 1993 in an attempt to reduce the variability in seasonal production, the two 
milk-marketing cooperatives in Florida, the Florida Dairy Farmers Association (FDFA), 
which marketed approximately 75 percent of Florida’s milk, and the Tampa Independent 
Dairy Farmers Association (TIDFA), which marketed about 25 percent, implemented a 
seasonal pricing plan.  The overall objective of the pricing plan was to provide an 
incentive for dairy farmers to change their patterns of production so as to produce less 
milk during the surplus months and more during the deficit months.  By achieving this 
objective, the cost associated with importing and exporting milk would be reduced. 
 
The seasonal pricing plan was in place from January 1993 through December 1995.  Due 
to the apparent ineffectiveness of the plan, Florida cooperatives voted to do away with 
the seasonal pricing plan after three years.  However, upon closer examination, it is 
apparent it was not the plan that was unsuccessful, but rather the lack of full participation 
in the plan on the part of the cooperatives’ membership that was at fault.  
 
Cost of Importing and Exporting 
 
In 1992, the last year before the implementation of the pricing plan, significant amounts 
of fluid milk were imported into and exported out of Florida.  Because of transportation 
costs, imported milk costs cooperatives more, on average, than milk produced in Florida 
while exported milk, on average, results in a price returned to producers below the price 
received in Florida.  For the five-month period in 1992, July through November, Florida 
cooperatives imported 110.5 million pounds of milk at a total cost of $20.2 million (Table 
1) for an average price paid of $18.25 per hundredweight. For the remaining seven 
months, January through June and December, Florida cooperatives exported a total of 
122.1 million pounds of milk at a total return of only $11.7 million for an average price 
received by producers of $9.58 per hundredweight which had transportation cost 
subtracted (Lawson, Kilmer, and Nubern).  
 
The Pricing Plan and Participation  
 
The seasonal pricing plan was implemented in an attempt to entice individual farmers to 
change their production patterns to reduce the seasonality of production and aid in cutting 
the costs associated with imports and exports. Each farm’s production in the three highest 
producing months (March, April, and May) was summed and divided by 92 (the total 
number of days in these three months) to give a per day base production amount for each 
farm. The premium per hundredweight was paid in the lowest production and highest 
importing months (August, September, and October) when the average daily production 
in any of these months was greater than 75 percent of the daily base production in March,   6
April and May.  Farmers meeting this criterion were paid a premium of at least $3.00 per 
hundredweight, which was added to the market price for all milk produced in excess of 
75 percent of their daily production base. 
 
Production data from January 1992 through October 1995 was collected for 68 of a 
possible 307 dairy farmers that belonged to FDFA and TIDFA dairy cooperatives.  All 
farmers included in the data set were farmers that produced each year from 1992 through 
1995 and were Dairy Herd Improvement Associate members.  In 1993, 1994, and 1995, 
of the 68 farms 37, 40, and 47 percent participated in the pricing plan (Washington, 
Lawson and Kilmer).  Accordingly, there were 25 participants (43 non-participants) in 
1993, 28 (40) in 1994, and 32 (36) in 1995.    
 
The Plan That Failed? 
 
Figure 2 depicts the average daily production in 1992, the year before the plan, for each 
month for all farms in the two milk-marketing cooperatives.  Also, shown is the monthly 
average for all the months that the plan was in place (January 1993 through December 
1995) for the 68 farms in the data set.  The plan was not effective in reducing the 
seasonality of production for the 68 farms.  However, upon closer inspection, it is 
apparent that the voluntary nature of the pricing plan caused the plan to fail. 
 
Although the seasonal pricing plan may have appeared unsuccessful overall in reducing 
seasonality, assessing the effects of the pricing plan on farms that participated in the plan 
separately from those that did not shows a different outcome. Results (for details see 
Washington, Lawson and Kilmer) indicate that of the 68 farms used in this study, those 
farmers  that participated in the seasonal pricing plan were able to reduce output 
seasonality in each year (1993-1995) by as much as 20 percent (Figure 3)!  For those 
farms that did not participate, seasonality actually increased in each year by as much as 
32 percent!  These results were supported in an examination of the actual production 
practices used by the farms where it was found that the participating farms altered their 
practices to change seasonal production (Washington, Kilmer, and Weldon). 
 
One of the ways for a dairy farmer to change the amount of milk being produced in 
response to a change in the price of milk is to change the milk production per cow by 
altering feeds and feeding practices. A second way to change the amount of milk being 
produced is to change the number of cows being milked.  The number of cows being 
milked can be changed by altering various practices including the proportion of cows 
milking, the total number of first lactation animals entering the herd, the culling and 
breeding rates and others.    7
 
Participating and non-participating farmers showed no difference in the seasonal use of 
production practices in 1992, before the seasonal pricing plan was put into effect. 
However, a different story emerges after implementation of the seasonal pricing plan in 
January of 1993. Numerous practices differed for non-participating farms compared to 
participating farms. Proportion of cows milking, milk production per cow, calving rates 
and other production practices differed in some or all three years.  In each case, the 
seasonal use of the production practices was less seasonal (i.e., smaller) for participating 
farms compared to non-participating farms. This reduced the degree of seasonality in 
milk production for participating farms compared to non-participating farms. 
 
Consequently, the seasonality of those that participated in the pricing plan decreased 
compared to 1992, while the seasonality of those non-participating producers clearly 
worsened (Figure 4).   Given that seasonality increased for those firms that did not 
participate, this dampened or overshadowed the pricing plan’s effectiveness.   Table 1 
gives insights into the potential benefits that could have been realized if the cooperatives 
had full participation in the plan and also the cost associated with not having the plan. 
 
As noted previously, in 1992 the cooperatives imported 110.5 million pounds of milk 
from July through November at a cost of $20.2 million and during the other months of 
the year exported 122.1 million pounds and received about $11.7 million.  These actual 
levels of imports and exports, given in Table 1, are the result of monthly production 
levels as depicted by the actual 1992 production seasonality index in Figure 4.  However, 
using the actual production and consumption data for 1992, but imposing the pricing plan 
and non-pricing plan participating indexes from Figure 4, generates the comparison in 
Table 1.  For example, if in 1992 all the cooperative producers had experienced the 
average seasonality index in Figure 4 of the farms that had participated in the pricing plan 
for the three-year period, and assuming prices and consumption unchanged, imported 
milk needs would have been only 85.6 million pounds, some 24.9 million pounds less, 
and cost $15.6 million or $4.5 million less.  In a similar manner, the quantity of milk 
exported during the January through June and December months would have been 
reduced.  Pounds of milk exported would have decreased from 122.1 to 95.4 million as 
production became less seasonal.   
 
Table 1 also presents the export and import values if the average seasonal production 
realized for the non-participating farms for the three-year period of the plan as given in 
Figure 4 were replicated for the entire cooperative membership in 1992.  Imported milk 
would have been 130.8 million pounds, some 20.3 million pounds higher, and cost $23.9 
million or $3.7 million more!  In a similar manner the quantity of milk exported during   8
the January through June and December months would have increased from 122.1 to 
141.3 million as production became much more seasonal. 
 
Thus, an effective seasonal pricing plan for the Florida cooperatives would require either 
mandatory participation of all members or a penalty for excess seasonal variability. This 
policy would do away with the incentive for non-participants to over produce to make up 
for the decrease in production by those who participate. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   9
For More Information: 
 
Lawson, Robert W. Jr., Richard L. Kilmer, and Chris Nubern.  "Potential for a 
Supply and Demand Balance in the Florida Milk Market, 1992".  Food and Resource 
Economics Department Staff Paper #93-14, University of Florida, October 1994:  1-26. 
 
Washington, Andrew, Robert W. Lawson, and Richard L. Kilmer. "An Evaluation 
of the Effectiveness of the Florida Cooperative Seasonal Pricing Plan on Seasonal 
Production Variability." Journal of Agricultural and Applied Economics.  (April 2000) 
113-121. 
 
Washington, Andrew A., Richard L. Kilmer, and Richard N. Weldon. "Practices 
Used by Dairy Farmers to Reduce Seasonal Production Variability." Agricultural and 
Resource Economics Review 31(1)(April 2002): 127-137.    10
 
 
Table 1:  Actual and Estimated Florida Dairy Cooperative Milk Imports and Exports for 1992. 
 Actual 
Assuming Seasonality of 
Pricing Plan Participating
Farms  
Assuming Seasonality of 
Non-Pricing Plan 
Participating Farms 
 1,000  Pounds 
Milk Imports  110,518  85,593  130,803 
Milk Exports  122,095  95,392  141,319 
 Dollars 
Cost of import  20,166,809  15,658,664  23,866,044 
Value of exports  11,711,289    9,173,476  13,585,448 
 
 
 
 
0.8
0.85
0.9
0.95
1
1.05
1.1
1.15
1.2
JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC
Month
I
n
d
e
x
Production Consumption
Figure 1. Florida Milk Production and Consumption Seasonality 
Index, January 1992 - December 1992.
Source: Florida Dairy Cooperatives  
 
   11
Figure 2. 1992 Milk Production and 3-Year Average (1993, 1994, and 
1995) Florida Seasonal Daily Production (Thousands).
4,500
5,000
5,500
6,000
6,500
7,000
JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC
Month 1992 3 Yr. Avg.  12
 
 
  
 
Figure 4. Seasonality of Actual Production in 1992 and 
Average Seasonality of Pricing and Non-Pricing Plan 
Participants for 1993-95.
0.8
0.85
0.9
0.95
1
1.05
1.1
1.15
1.2
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
I
n
d
e
x
Actual 1992
Pricing Plan
Non-Pricing Plan
 
-30%
-20%
-10%
0%
10%
20%
30%
40%
92/93 92/94 92/95
Figure 3: Percentage Changes in Seasonality when Compared to 1992 
for Production in 1993, 1994 and 1995.
Pricing Plan Non-Pricing Plan

REDUCING SEASONALITY IN DAIRY PRODUCTION

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