Efficiency Implications of the Dairy Farm Policy Reform in Israel

The dairy branch is one of the most regulated branches of agriculture in Israel. The dairy farm policy reform, initiated in 1999, enabled Israeli dairy farmers, for the first time, to trade production quotas, and encouraged capital investments through financial incentives. The consequence was a rapid exit of producers, an increase in the size of existing producers either through purchasing quotas or through mergers, and an improvement of production efficiency and milk quality. This paper employs Data Envelopment Analysis (DEA) to estimate the changes in production efficiency, using data from the dairy farm profitability surveys of 2003, 2005, 2007 and 2009. We found that dairy farms have become larger and more efficient during the reform period. Results also suggest that scale efficiency has increased over time for small family farms. Meta Production Frontier analysis showed that relatively small Moshav farms were able to catch up with the technology used by the most efficient farms in the industry, and this may explain the gradual increase in their scale efficiency. Larger Moshav farms, on the other hand, were not able to catch up with the technology used by the most efficient farms. Continued policies aimed at further concentration of production in fewer and larger farms are not necessarily the most effective approach to increase dairy farm efficiency. Efforts should focus on helping less efficient farmers to utilize the best available production methods and adopt more efficient production techniques.