Technical efficiency and productivity differentials of dairy farms in three EU countries: the role of CAP subsidies

The impact of EU agricultural support policies on farms’ economic performance is an interesting issue for policy makers. The objective of this paper is to investigate technical efficiency and technical efficiency change of specialized German, Dutch and Swedish dairy farms and to compare their relative productivity. Three subsidy-related variables are introduced to reflect the wealth and insurance effect and the coupling effect of Common Agricultural Policy (CAP) subsidies. Our results imply that a higher degree of coupling in farm support negatively affects farm efficiency, and the motivation of farmers to work efficiently is lower when they depend to a higher degree on subsidies as a source of income. Our study indicates that the composition of subsidies has a much smaller effect on efficiency than does the composition of total farm income. Relative productivity scores show that German and Swedish dairy farms have potential for improvement in productivity, compared to the production technology in the etherlands. In conclusion, it is questionable whether farm income support of CAP since the 1992 CAP reform is suitable to achieve its goal to increase farmers’ overall competitiveness by improving their efficiency.