The Impact of Paying for Milk Solids on the Performance of the Dairy Supply Chain and Consumers

Abstract An important particularity of the dairy chain is that many times the main interest of the dairy industry relies on milk components, the so-called milk solids. Paying for milk solids content is a way of trying to create incentives for farms to invest in improving the solids content. However, little is known about the effects of this type of payment on the dairy supply chain. The paper proposes a microeconomic model to analyze the effects of paying for milk solids content on the performance of farms, dairy processors and consumer welfare. Based on the model, we find that this mechanism improves the yield of milk in producing dairy products and benefits farms, processor and consumers simultaneously. Extensions demonstrate the robustness of results and provide a generalized model and conditions for which these results are valid.