Assessing the Response of Farm Households to DairyPolicy Reform in Israel

After nearly fifty years of stability and stagnation of dairy market regulations inIsrael, a dramatic policy reform has been enacted in 1999. The reform enabled farmhouseholds, for the first time, to trade production quotas. In addition, the reformsignaled to farmers that milk prices will gradually go down in real terms, andtherefore only producers who expand and become more efficient will prevail. Thereform allowed for generous financial support for investment in expansion, but alsorequired the adoption of environmental regulations which could be costly to manyfarm families. This paper uses data from a census of small family-operated dairyenterprises that was conducted in 2001, in order to analyze the response of farmhouseholds to the reform. The results imply that the reform was particularly attractivefor already strong producers. Weaker producers are less attracted by the reform andwill likely fade away by default in the long run. Another finding is thatintergenerational succession is an important element of decision making of milkproducers. Hence, the response of farm households to changes in the economicenvironment cannot be disentangled from the occupational decisions of theiroffspring. These findings imply that the desired structural change in the family-farmmilk production sector will take much longer than expected, essentially as long as thecurrent generation of producers is around. This requires, perhaps, an extension of thereform period or a change in incentives in favor of the smaller and older producers.[...]