Component supply responses in dairy production

Abstract

Under multiple component pricing schemes, the price of milk depends on its content of components such as fat, protein and lactose. A theoretical model of component supply under tradable quota regime is developed. A system of output supply and input demand equations is then derived and estimated for a panel of Icelandic dairy farms. Results show that milk component supply responds to price incentives in the short-run despite rigidities in component production technology. The own-price supply elasticities of fat and protein are 0.26 and 0.23 in the quota milk market and 0.02 and 0.25 in the surplus milk market, respectively.