Profitability and exit decisions of organic dairy farmers in the EU

• We analyze the relationship between dairy farmers’ decision to produce organically and their profitability. • We investigate the decision of farmers to exit organic production. • Our results reveal that organic farms achieve, on average, a higher profitability. • The probability of exiting the organic market increases consistently in the years after conversion. • The results show that policy-makers should specifically target the early phase after conversion. Global policy goals have been set for the expansion of organic farming. However, in most European countries, progress towards this goal is limited, with some organic farmers reverting to conventional production or ceasing production altogether. While various studies have addressed the profitability of organic farming, holistic evidence on the EU level and on farmers’ exit decisions is still lacking. We use a large dataset covering 71% of the EU market to analyze the relationship between dairy farmers’ decision to produce organically and their profitability. Moreover, we investigate the decision of these farmers to exit organic production. Our results reveal that organic farms achieve, on average, a higher profitability. However, the probability of exiting the organic market increases consistently in the years after conversion, peaking in year eight, which reflects difficulties in the transition process. Subsequently, exit probabilities decrease as farms seem to have familiarized themselves with organic production methods and positioned themselves in the sector. Finally, downward fluctuations in profitability and price premiums for organic milk are associated with a higher exit probability. The results show that policy-makers should specifically target the early phase after conversion and provide risk management instruments to support policy targets for organic production.