The increased price variability of the EU farm gate milk price in recent times makes it necessary for farmers as well as policy makers to analyze which factors attribute to this variability. In this study the EU, German and Irish farm gate milk price is therefore decomposed into its trend, seasonal and cyclical components using state space models. The decomposition results are used to analyze which components attribute to the huge price variability observed in recent times and how the Common Agricultural Policy (CAP) changed the price dynamics. They show that the dynamics of the EU, German and Irish series converged after the CAP 2003 reform. The dynamics are also compared to the US market. Another main result is that most of the observed price volatility in recent times is attributed to the cyclical component. Price volatility is therefore to some degree predictable and intrinsic to the dairy industry.


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