Abandonment of milk production under uncertainty and inefficiency: the case of western German Farms

This article examines the impact of technical efficiency on farmers’ irreversible optimal exit timing in a real options model. The model suggests that both higher efficiency and higher output price volatility make the farm more reluctant to irreversibly exit production. We test these hypotheses using farm panel data from 1997 to 2011 for milk producers in western Germany. Our findings confirm that ceasing operations in the dairy branch correlates with low efficiency of milk production and higher efficiency in other branches. A mild deviation from optimality, however, does not trigger immediate abandonment. Moreover, we find an attenuated impact of efficiency under more volatile market conditions.