Modeling the Profitability of Milk Production—A Simulation Approach

Dairy farm profitability in the European Union has become increasingly volatile following market deregulation, complicating farm operations and undermining food security amid geopolitical tensions. To address the need for a streamlined analytical tool, this study develops a simulation model of milk production profitability tailored to small, open economies, using Poland as a case study. The model defines a profitability coefficient as the ratio of sector-level milk revenues to feed costs and decomposes it into three dynamic components: production efficiency (milk yield per feed unit), the price spread between milk and feed, and the net effect of policy interventions on revenues and costs. Exogenous variables (milk prices, feed prices, and policy support indices) are projected under baseline, optimistic, and pessimistic scenarios, while endogenous variables (profitability, herd size, and yield) evolve recursively based on estimated lags reflecting biological and economic responses. Simulation results for 2023–2027 indicate that profitability trajectories hinge primarily on price spreads, with policy measures playing a stabilizing but secondary role. Optimistic scenarios yield significant increases in profitability, whereas pessimistic assumptions lead to significant declines. These findings highlight the need to balance key market drivers—such as the relationship between milk prices and feed costs—with appropriately designed support instruments for milk producers. The model provides policymakers with a tool to adjust interventions so that support instruments are effective but do not lead to excessive reliance on public assistance.