Organic or conventional? Optimal dairy farming technology under the EU milk quota system and organic subsidies

This paper assesses the competitiveness of organic and conventional dairy farms under different milk market and organic farming policy scenarios. We use a DEA-based model to estimate for each policy scenario the sample farms' profit potential in both technologies. The model enables identification of a farm's optimal technology based on its input-output observations. The empirical analysis is based on the annual accounts of 1300 Bavarian dairy farms. Results indicate that approximately 69% (78%) of the organic (conventional) farms have chosen their optimal farming system. The remaining organic (conventional) farmers could increase their profit on average by roughly 6% (10%) by switching to the other technology. Abolishment of the EU milk quota results in a considerable decline in the number of sample farms for which organic farming is the optimal technology, suggesting that, ceteris paribus, organic dairy farms may lose competitive advantage with the deregulation of the EU's milk market regime in 2015. Organic maintenance payments more than double the number of farms with a higher earning potential in organic farming, but their effectiveness could decline when the milk quota is abolished.