Quota Deregulation and Organic versus Conventional Milk – A Bayesian Distance Function Approach

Milk quota trading rules differ across EU member countries. In Denmark a biannual milk quota exchange was set up in 1997 to promote a more efficient reallocation of milk quotas as well as to reduce transaction costs related to the searching and matching of sellers and buyers. Using two comprehensive panel data sets on organic and conventional milk farms this study attempts to disentangle the effects of the introduction of an increased quota transferability on the production structure of those farms as well as the probability of market entry and exit. Bayesian estimation techniques are used to estimate an input oriented generalized Leontief distance function as well as a curvature constrained specification. The results suggest that the deregulation in the quota allocation mechanism led to an increased efficiency with respect to organic as well as conventional milk production. A relative shift of the PPF in favor of the production of organic milk has been found. In the post deregulation period the probability of farms entering organic milk production from conventional milk production has been significantly increased and the probability of farms exiting organic milk production to produce other non-organic output has been significantly decreased.