Economies of Size in Processing Manufactured Dairy Products and Implications for the Southern Dairy Industry

Fluid milk marketing is characterized by daily and seasonally fluctuating raw milk production, variable fluid processing schedules and seasonally fluctuating consumption patterns. These conditions, plus the perishable nature of the product and a relatively low short-run elasticity of demand for fluid milk, are generally considered to be factors requiring volume of Grade A milk available to an area at any given time to exceed the amount actually consumed in the fluid form—if the market is to be characterized by a reasonable degree of price stability. This excess is often referred to as the minimum or “necessary†reserve. The volume of excess milk available may be greater than this minimum, however, as a result of other factors such as classified pricing or producer prices above equilibrium levels.