ORIGINAL RESEARCH The potential for scale economies in milk powder processing: an Irish case study TREVOR DONNELLAN, 1 * THIA HENNESSY, 1 MARK FENELON 2 and DONAL O ’ CALLAGHAN 2 1 Agricultural Economics and Farm Surveys Department, Rural Economy Research Programme, Teagasc, Athenry, Co Galway, and 2 Dairy Products Research Centre, Teagasc, Moorepark, Fermoy, Co Cork Ireland This paper examines the difference in costs associated with milk plants of differing dryer scale in Ireland. This is an important question for international competitiveness in the context of the removal of the EU milk quota in 2015 and the expectation that Irish milk production could increase considerably thereafter. Using confidential data obtained from a number of sources, the differential in the cost of processing at differing plant scales was established. It was found that two 7.5 tonne/h dryers at a single location provide a level flexibility which offsets the slight cost advantage associ- ated with a 15 tonne/h dryer. Keywords Milk processing, Milk powders, Dairy economics. INTRODUCTION The dismantling of the European Union (EU) milk quota regime in 2015 may present new opportunities for growth in the Irish dairy sector. It was in this context that the Irish Government published its ambitious growth plan for the agri- food sector in 2010. The Food Harvest 2020 report (DAFM 2010) includes a target for increased milk production in Ireland of 50% in volume terms by 2020. Clearly, such a signifi- cant increase in production would present many challenges at the farm, product assembly, pro- cessing and marketing stages of the food chain. The current seasonal supply pattern for manu- facturing milk in Ireland, based mostly on spring calving grass-based production, shows an approximate 7:1 peak to trough month ratio, Quinlan et al. (2011). Typically, Ireland’s milk processing plants are operating at full capacity during the peak supply months, with relatively limited scope during this period to alter the dairy product mix in response to anticipated market returns. This means that additional pro- cessing capacity will be required if Irish milk production increases and this seasonal pattern of production is retained. Given the international trend towards processing facilities with larger output capacity, the envisaged increase in Irish milk production raises important questions about the appropriate size of new processing plants. The objective of this paper is to quantify the economies of scale that may exist in milk drying plants to determine the marginal savings that can be achieved by processing product in a larger dryer. The analysis considers initial estab- lishment costs, financing costs and those opera- tional costs that vary with scale, such as labour and energy. BACKGROUND Ireland has a climate which is highly favourable to grass growth, and consequently 90% of the agricultural area in Ireland is devoted to grass- land. Most of this area is used for beef produc- tion, while milk production, which is far more profitable than beef production, only accounts for about 20% of the grassland area. Ireland has one of the lowest cash costs for milk production in Europe, and this means that Ireland is well placed to expand milk production when milk quotas are removed in 2015 (Donnellan et al. 2012). Since Ireland joined the EU in 1973, the dairy product mix has been heavily weighted towards the production of butter and skim milk products, which could be sold to intervention in periods *Author for correspondence. E-mail: trevor.donnellan@teagasc.ie © 2013 Society of Dairy Technology Vol 67, No 1 February 2014 International Journal of Dairy Technology 129 doi: 10.1111/1471-0307.12109