Market power, profitability and the decision to exit organic dairy farming in the EU

Organic agriculture is a widely established production system that contributes to various sustainability goals. The European Commission has set the goal of 25% organic agriculture in 2030 in its Farm to Fork strategy, putting it further in the spotlight. However, in most European countries, progress towards this goal is still limited, and some farmers even move back to conventional production. The further expansion of organic farming will crucially depend on the development of organic markets and its financial competitiveness. However, evidence on the economic performance of organic farmers in the EU and the decision to revert back to conventional production is lacking. We analyze the causal effect of dairy farmers’ decision to produce organically on farm competitiveness measured by price markups and profitability. Moreover, we investigate the decision of organic farmers to revert back to conventional farming using survivorship analysis. Our results reveal that organic farms achieve higher markups and profitability. But, there is a high probability of exiting the organic market in the early phase after transition - especially for farms with highly volatile economic performance. The results provide insights that may help to reach the political targets with regards to the market share of organic agriculture.