A cost-based model of seasonal production with application to milk policy

Milk production is seasonal in many European countries. While quantity seasonality poses capacity management problems for dairy processors, an EU policy goal is to reduce price seasonality. After developing a model of endogenous seasonality, we study the effects of three EU policies on production decisions. These are private storage subsidies, production removals, and production quotas. When cost functions are seasonal in a specified way, then arbitrage opportunities interact with storage subsidies to reduce both price and consumption seasonality. But production seasonality is likely to increase because storage subsidies promote temporal market integration. Conditions are identified under which product market interventions increase quantity seasonality.