ORGANIC OR CONVENTIONAL? OPTIMAL DAIRY FARMING TECHNOLOGY UNDER THE EU MILK QUOTA SYSTEM AND ORGANIC SUBSIDIES

We analyse the relative competitiveness between organic and conventional dairy farming under different hypothetical agricultural policies using a DEA-based comparison of each farm’s earning potential in both technologies. This model allows us to identify a farm’s ex post optimal technology based on input-output observations. Results for Bavarian dairy farms indicate that more than 70% of the farms in both technologies – organic and conventional – have chosen their optimal farming system. The remaining organic (conventional) farmers could increase their profit by roughly 7% (18%) on average by switching to the other technology. Abolishment of the EU milk quota reduces the number of sample farms for which organic farming is the optimal technology considerably. This finding suggests that ceteris paribus organic dairy farms may lose competitive advantage with the deregulation of the EU’s milk market regime in 2015. Simulations show, that this effect may be offset by a price decline for conventional milk of more than 10% relative to the price for organic milk. Another finding reveals that subsidies specifically paid to organic farmers roughly double the number of farms who have a higher earning potential in organic than in conventional dairy farming