Payments of around €6.5m will be made this week to 3,500 dairy farmers under the Voluntary Supply Management Scheme.
The Minister for Agriculture, Michael Creed, confirmed that payments will start to issue in the coming days to milk suppliers in respect of Phase I of the EU scheme.
The scheme was a short term market stabilisation mechanism introduced by the EU Commission last year as part of a range of tools to mitigate price volatility in the dairy sector.
Up to 4,500 farmers originally applied for the scheme but around 1,000 applicants opted against proceeding with planned output reductions.
The average payment to the Irish milk suppliers who participated in the scheme will be around €1,850.
"My Department has commenced payments under Phase 1 of this scheme which will see almost €6.5m paid out to 3,500 Irish dairy farmers who applied for aid to reduce their production in the last quarter of 2016," Minister Creed said.
"This will provide a significant cashflow boost to dairy farmers at an important time of year," he added.
The €150m scheme was introduced by the Commission to encourage milk supply reductions across Europe last year and to halt the downward slide in prices.
It was envisaged that the measure would cut output across the EU by around 1.1m tonnes if fully utilised. It eventually took out close to 850,000 tonnes.
The overall supply reduction in Ireland was approximately 45m litres.
Reacting to the news, ICMSA dairy committee chairman, Gerald Quain, said the payments were a timely boost for the 3,500 dairy farmers.
However, Mr Quain said the real significance of the scheme was that it helped deliver higher milk prices.
"The scheme introduced in the second half of 2016 proved to be very effective in boosting milk prices and put pressure on processors and retailers during this period to pay a stronger price to farmers," he said.
Mr Quain claimed the Voluntary Supply Management Scheme should become a permanent part of EU dairy policy to be introduced during periods of market downturns as it hands an element of power back to primary producers to cut back production and keeps pressure on processors to pay a stronger price.
"The CAP post 2020 discussions need to give greater powers to farmers to protect their incomes and the Voluntary Reduction Scheme must form part of the policy going forward to achieve this objective," said Mr Quain.
Meanwhile, the Department stated that payments under phase II of the milk reduction scheme will issue by the end of April.