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The traditional system of milk production in NZ is seasonal, with all cows calving during late winter and early spring. Consequently, production of milk for manufacturing in New Zealand is characteristically very high in spring (about 30% of the total milk is supplied during the peak months of October and November) and virtually zero in winter. To process all the milk supplied during the peak period, adequate processing plant, transport vehicles, and storage facilities are required. These assets are under-utilised for most of the year as, on average, only 54% of the total processing capacity is used on an annual basis. In addition, the manufacturing sector is forced to concentrate on commodities, as it is not possible to manufacture high value products at the rate required during the peak milk flow. Clearly, there is considerable scope to increase processing and marketing efficiencies if more milk could be supplied over a longer portion of the year. However, any change in the pattern of milk supply is likely to increase production costs, and would therefore require appropriate price incentives. The overall objective of this research was to explore different seasonal pricing schemes that could be implemented in New Zealand to reduce the seasonality of milk production, and to estimate the effects that such schemes might have upon farm management practices, milk supply patterns, and milk production costs, especially in the context of the South Island. To accomplish these objectives, a linear programming model of a case study South Island dairy farm was developed. Results of the initial model runs showed that, compared to the current situation, more milk could be supplied outside the peak at no extra cost, because of the economic advantage of feeding the cows to achieve longer lactations and higher milk solids production. Therefore, no premiums would be required to encourage farmers to pursue such a practice, since it would be a more profitable alternative than the traditional system involving cows with short lactations. However, results also showed that extending the lactation would have only a marginal effect upon increasing milk throughput outside the peak period. Thus, a significant reduction in the seasonality of milk production would require adopting different calving dates. The model was then used to explore farming systems involving varying proportion of the herd calving in autumn and to calculate the costs of producing milk from these systems, under varying milk solids prices. It was concluded that the base milk solids price has an important effect on the costs of changing milk supply patterns, and hence, on the price incentives that would be required to compensate for such costs. Finally, the third phase involved simulating different payment systems that could be implemented in New Zealand to reduce the seasonality of milk supply. Results indicated that seasonal pricing schemes involving winter premiums would be the most cost effective means of encouraging farmers to change their milk supply patterns.