Threshold Effects in Transition to Organic Dairy Production

Despite dramatic increases in retail demand for organic milk and steadily increasing organic milk prices over the past 15 years, transition from conventional to organic dairy production has been unsteady. In some years supply has not met demand, leading to shortages of organic milk, and in other years organic dairy processors have been forced to sell organic milk in the conventional market. Following the theory of investment under uncertainty we estimate the organic transition response of dairy producers to feed and milk prices while allowing for distinct regimes of investment, disinvestment, and inaction. Using a threshold estimation technique developed for panel data we estimate the threshold values that define these regimes. We find some support for a discontinuity in the organic transition response, though a double threshold model, including a sluggish transition regime, is rejected.