An analysis of the effect of milk compositional standard on the profitability of Ontario dairy farms

The purpose of this study is to examine the effect of the milk compositional standard on the profitability of Ontario dairy farms. In 2005, Dairy Farmers of Ontario implemented the solids-non-fat (SNF) to butterfat (BF) ratio standard in order to overcome the problem of structural surplus of skim milk powder. The study develops a theoretical model to describe the effects of this standard and component pricing on profitability. To test whether the standard has an effect on the profitability of Ontario dairy farms, a fixed effect regression model is estimated using rotating panel data from the Ontario Dairy Farm Accounting Project over the period 1996 to 2008.;The results reveal that the SNF:BF ratio standard may not have a statistically significant influence on the profitability of the sample farms. An in-depth descriptive analysis of producers' responses to the SNF:BF ratio standard shows that the majority of the sample farms were operating below the target ratio. The SNF:BF ratio standard may be a non-binding constraint for the majority of the farms, and allows producers operating below the target ratio to trigger for higher ratios. For a smaller percentage of farms operating above the target ratio the standard may be a binding constraint, and these producers may respond to the standard by decreasing their ratios. In this context, the SNF:BF ratio standard may not act as a restrictive policy in controlling SNF production; rather, it may act as a preventive policy signalling producers not to produce SNF above the target ratio.