This paper examines EU dairy sector and market developments, and the likely impact of the milk quota removal. The latter is illustrated by model simulations focused on the Dutch dairy farm sector. Declining milk prices raise the question whether quota are still relevant to the sector. Ongoing trade liberalisation will further push down EU milk prices, with significant income effects. The Dutch case study shows that early quota abolition will be beneficial for larger farms eager to expand and enhances structural change. Implications for the European dairy processing sector are discussed too. The paper concludes by presenting sets of policy instruments that may facilitate the sector gradual adjustment to a situation without milk quota.

This paper estimates a production function for milk using a generalised method of moments estimator to avoid the endogeneity problem. Using the first-order conditions for profit maximisation, the economic effects for individual Dutch dairy farms of the 2003 EU dairy policy reform are analysed. With an expected milk price decrease of 21 per cent, profit decreases on average by 22 per cent. EU direct payments compensate for roughly 53 per cent of this fall in profit. The profit reduction means that 69 per cent of all small farms have negative income from farming, compared with 15 per cent in the initial situation.