Structural Change in the Dairy Sectors of Germany and The Netherlands - A Markov Chain Analysis

With the milk quota announced to be abolished in the future, the dairy sector is going to face a significant policy regime shift. This paper sets out to analyze the impact of milk quotas on the dairy farm structure of two important milk producing member states: Germany and the Netherlands. Based on proper behavioral assumptions, non stationary Markov chain models are specified and estimated using a generalized cross entropy procedure, which takes into account both sample and prior information. Moreover four mobility indicators characterizing structural change are developed and calculated. Structural change in the dairy sector as measured by the mobility measures is faster in West Germany than in the Netherlands. However, in the transition region East Germany structural change outpaces that of the traditional German and Dutch dairy sectors by a factor two or more. The introduction of milk quotas as of April 1, 1984 reduced overall farm mobility for the Netherlands, but increased mobility in West Germany. However, in both cases the milk quotas lead to an increase in upward mobility.