Assessing the Response of Farm Households to Dairy Policy Reform in Israel

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