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Public policies and private initiativesin transition: evidence from the Polishdairy sectorLiesbeth Dries a , Jan Fałkowski b , Agata Malak-Rawlikowska c &

Dominika Milczarek-Andrzejewska ba Wageningen University , Wageningen, The Netherlandsb University of Warsaw , Warsaw, Polandc Warsaw University of Life Sciences , Warsaw, PolandPublished online: 16 May 2011.

To cite this article: Liesbeth Dries , Jan Fałkowski , Agata Malak-Rawlikowska & DominikaMilczarek-Andrzejewska (2011) Public policies and private initiatives in transition:evidence from the Polish dairy sector, Post-Communist Economies, 23:02, 219-236, DOI:10.1080/14631377.2011.570051

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Public policies and private initiatives in transition: evidence from thePolish dairy sector

Liesbeth Driesa*, Jan Fałkowskib, Agata Malak-Rawlikowskac and Dominika Milczarek-

Andrzejewskab

aWageningen University, Wageningen, The Netherlands; bUniversity of Warsaw, Warsaw, Poland;cWarsaw University of Life Sciences, Warsaw, Poland

(Received 25 November 2010; final version received 31 January 2011)

The drivers of institutional change in Central and Eastern Europe have changedconsiderably since 1989. Taking these changes into account, we identify three – partlyoverlapping – transition stages: public policy changes dominated the start of transition,private initiatives became crucial in a second stage and, more recently, policy changesrelated to the EU accession process became the dominant drivers. We use uniqueprimary interview data on the supply chain and farm household data to study the impactof these institutional changes on structural adjustments in the Polish dairy sector. Wefind distinct patterns in farm restructuring and link these results to specific institutionalchanges in the different transition stages.

The transition process that started in Central and Eastern Europe 20 years ago has been

accompanied by major institutional changes. While this has affected the whole economy,

the impact has been particularly profound in the agricultural sector. These institutional

changes have resulted in organisational reform at the firm level (e.g. changing farm types

and structures in the agricultural sector) but also at the level of the market and the supply

chain.

Given the importance of the agricultural sector in a transition context, there is still a

need to gain better understanding of the mechanisms at work behind these changes. This

article therefore identifies three broad stages of institutional change that differ from each

other both in nature and in terms of the main drivers of change. The identification of these

stages is based on findings by several authors. However, where other authors have often

focused on only one of the three stages, the unique approach of this study is to present an

integrated picture and use data that link the different stages.

To achieve this, we take a closer look at the dairy sector in Poland. This sector has

experienced a huge restructuring during the transition period (Wilkin et al. 2007). This is

of importance for at least two reasons. On the one hand, the analysis of this sector is likely

to provide interesting examples to highlight and follow the pattern of institutional changes,

their causes and effects. On the other hand, questions still remain about the restructuring

process. Therefore, detailed investigation of institutional changes may have empirical

relevance in understanding the observed data. By analysing how dairy supply chains,

ISSN 1463-1377 print/ISSN 1465-3958 online

q 2011 Taylor & Francis

DOI: 10.1080/14631377.2011.570051

http://www.informaworld.com

*Corresponding author. Email: liesbeth.dries@wur.nl

Post-Communist Economies

Vol. 23, No. 2, June 2011, 219–236

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markets and firms have been affected in the three stages of transition, we aim to present a

more general picture of the impact of the changing institutional environment on structural

change in the agri-food sector.

In the first part of the article we draw on the existing literature and identify the three

stages of institutional change. Next we provide information about the data and

methodology for data collection that were used for this study. The following section

discusses institutional changes that have occurred in the Polish dairy sector during the

three stages in the transition process. We also outline the main changes in terms of supply

chain and market structure that occurred in these respective stages. In the next section we

provide detailed evidence of the implications of these institutional changes at the

organisational, i.e. farm, level. Finally, we identify the barriers that exist for further

restructuring and we draw conclusions.

Three stages of institutional changes

The first stage we identify, the start of transition (early 1990s), was characterised by major

policy changes, which included among others trade liberalisation, the breakdown of the

system for market support, privatisation of state enterprises and the transformation of

firms.1After this initial period which was dominated by major policy changes, private

initiatives start to prevail as a driver for institutional and organisational change in the

second stage of transition (roughly mid- to end-1990s). It is in this period that foreign

investors, attracted by large new markets and a stabilising economic environment, become

important players in the institutional setting (Gow and Swinnen 1998, Walkenhorst 2001,

Jansik 2002). The most recent period – the third stage we identify (roughly since 2000) –

is again dominated by public policy changes as economies in Central Europe become

gripped by the EU accession process.

Although we exaggerate the distinction between the three stages of transition for

reasons of clarity, we acknowledge that the degree of interaction between public policies

and private initiatives is sometimes hard to assess. On the one hand, private initiatives can

be undertaken in response to the lack of public regulations. This can be done either pro-

actively, when a future policy change is expected, or out of necessity when market failures

exist and public policy solutions are not expected to occur in time. An example of this is

found in the arena of milk quality improvement. Low milk quality was a major problem in

the Polish dairy sector in the mid-1990s. However, at the start of the transition period,

public efforts were mostly directed towards market stabilisation and milk quality

improvement was largely ignored. As a result, private initiatives focused on assisting

adjustments at the farm level that were deemed necessary to improve the quality of milk

deliveries. It was only after 2000 that the government started to get involved in the issue of

milk quality with the subsequent tightening of restrictions on the minimum quality level of

delivered milk and the introduction of premiums for high-quality milk deliveries. On the

other hand, private actors can influence the public decision-making process through their

lobbying activities. An example is the lobbying by dairy companies and dairy associations

with respect to the specifics of implementation of the milk quota system in Poland.

Having said that, although our approach has some limitations, we believe that

identifying these three broad stages of institutional changes and bringing them into one

coherent picture nonetheless provides a new opportunity to understand the drivers of

restructuring of the agricultural sector. It is the more important given the unique datasets

of Polish dairy farms that we use to complement the evidence from secondary sources. The

strength of these two datasets is that the data were collected in different stages of the

220 L. Dries et al.

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transition process. More specifically, the dataset that we will refer to as ‘the 2001 sample’

contains farm household information covering the period from 1995 to 2000. Similarly,

‘the 2007 sample’ provides detailed information about dairy farms between 2001 and

2006. Although we realise that there are no exact boundaries to the three stages that we

identified at the outset, the existing literature allows us to assume broadly that the impact

of private forces became especially relevant in the second half of the 1990s and hence is

captured by the 2001 sample. On the other hand, the impact of the accession process will

have been stronger in the run-up to, and after, the actual accession date, which means that

the 2007 sample should pick up more of this influence. Therefore, these datasets enable us

to make a unique comparative analysis of the dynamics in the Polish dairy sector under the

influence of significantly different institutional changes.2

Data

The data that are used in this article were collected in the Warminsko-Mazurskie region,3

in the north-east of Poland. Warminsko-Mazurskie is an important dairy region with a rich

natural environment that is especially favourable for milk production. Compared with

other regions in the country, Warminsko-Mazurskie has a relatively good farm structure

(although still highly fragmented by West European standards). The reason for this is that

a significant share of the privatised and restructured former state farms are located in this

region. Table 1 presents the dairy farm distribution in Warminsko-Mazurskie and the

whole of Poland. The figures show that over 60% of Polish dairy farms have only one or

two cows, while the share of one and two-cow farms is lower on average in the

Warminsko-Mazurskie region – around 37%. However, we can conclude that an

important share of the regional cow population is still kept on subsistence and semi-

subsistence farms, i.e. farms which market none or only a limited share of their milk.

Furthermore, the data show that while the total number of dairy farms has decreased

substantially in the past decade, the number and the share of larger farms – 10 cows and

more – has grown both in Poland and in the study region.

Data were collected at two different levels and at two different points in time. The first

level consisted of in-depth, semi-structured interviews with representatives of dairy

processing companies, dairy farm focus groups and other key informants in the dairy

sector. The purpose of these interviews was to provide an overall view of the restructuring

of the Polish dairy supply chain. The interviews covered topics such as the main changes

in the dairy sector, the drivers of change and relationships between segments of the dairy

supply chain. In the second step, we collected data at the farm level through a farm

household survey. Structured survey questionnaires were used, including retrospective

questions spanning the five-year period before the interview date. The farm household data

provide insights into the (quantifiable) structural impact of institutional changes at the

dairy farm level.

The interviews and the survey were conducted in 2001 and again in 2007.4 In the

following sections we will refer to the 2001 and the 2007 sample when discussing the data

collected in these two surveys respectively. The survey methodology was based on a

random sampling framework.5 This involved the random selection of a number of powiaty

(sub-regions), gminy (local communities) and finally villages.6 It should be noted that both

datasets include only households that were delivering milk to a dairy processor five years

prior to the time of interview. In other words, the survey focused on commercial farms –

with an explicit link to the dairy processing sector – to capture possible institutional

changes that affected farms through their dealings with downstream segments of the

Post-Communist Economies 221

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222 L. Dries et al.

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supply chain. Furthermore, both samples contain a group of households that withdrew

from milk sales over the periods analysed. This enables us to minimise sample selection

bias due to exits but also to study the link between institutional changes and farmers’

market choices.

Table 2 describes the farm size distribution in the two farm household datasets. The

2001 survey included 287 rural households, while 195 households were interviewed in

2007. Comparing the farm size distribution of our samples with the data in Table 1 shows

that the smallest farms are underrepresented in our samples. This is explained, at least

partly, by including only commercial farms in our sampling frame. Furthermore, we

observe that the 2001 sample includes a higher share of small to medium farms (less than

10 cows) than the 2007 sample. On the other hand, larger farms (more than 20 cows) are

better represented in the 2007 sample.7

Institutional change in the Polish dairy sector

The start of transition

Changing institutional framework

The collapse of the socialist system in Central and Eastern Europe created a policy gap and

the need for a comprehensive strategy for the way forward. Papers such as Lipton and

Sachs (1990), Murphy et al. (1992) and Blanchard et al. (1993) advocated the so-called

‘big bang’ approach and argued that all reforms should be implemented as quickly as

possible and as a package. In other words, monetary policy, trade policy, market support

policy, privatisation and firm transformation policies were to be introduced more or less

simultaneously. Although there were also a number of advocates for gradualism (e.g.

Dewatripont and Roland 1992, 1995), it was the former approach that was adopted

Table 2. Sample description: farm size distribution.

Herd size1–2 3–4 5–9 10–19 $ 20 Total

Number of farms

Sample 20011995 11 35 116 112 13 2872000 32 29 77 103 36 277Sample 20072001 4 13 66 89 23 1952006 8 13 35 76 46 178

Share of farms

Sample 20011995 3.8 12.2 40.4 39.0 4.5 1002000 11.6 10.5 27.8 37.2 13.0 100Sample 20072001 2.1 6.7 33.8 45.6 11.8 1002006 4.5 7.3 19.7 42.7 25.8 100

Notes: Figures for 1995 (2001 sample) and 2001 (2007 sample) include only commercial farms. On the otherhand, figures for 2000 (2001 sample) and 2006 (2007 sample) include both commercial farms and farms that havestopped delivering milk to dairy companies but that still have at least one cow.Source: Own calculations based on survey samples.

Post-Communist Economies 223

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throughout Central and Eastern Europe. As a result, the regulatory framework in which

producers and firms operated changed dramatically almost overnight.

In Poland the start of transition was announced by the introduction (or abandonment)

of a number of policies. These included price liberalisation, market liberalisation – which

resulted in free domestic and foreign competition as well as increased possibilities for

exports–and the privatisation of productive assets.

The change of economic system and the adjustment to market conditions during the

transition period in the 1990s had a dramatic impact on the situation of milk producers.

During the 1990–1995 period nominal milk purchase prices increased ca. 11 times. At the

same time however, nominal farm input prices increased ca. 38 times whereas prices of

consumption goods increased 35 times. Therefore, the real milk price decreased by almost

70%. This caused a significant decrease in profitability of milk production (IERiGZ 2005,

p. 55). From 1996, after the initial shock period,8 the situation on the market stabilised. At

that time the Agricultural Market Agency – the state intervention agency for agricultural

markets – also started intervention purchases for butter and skimmed milk powder and

introduced the first measures for protecting the internal market. Real milk prices started to

increase and so did milk production (IERiGZ 2005). Another support measure that seemed

crucial for the dairy market was a system of preferential credits, which was introduced in

1994. Funds from that source were extremely important for the restructuring of the

processing segment in the 1990s.

Changing market and supply chain structures

Under the communist regime production and processing were centrally planned and

vertically integrated. Vertical coordination was widespread in these state-controlled food

supply chains as production at various stages and the exchange of inputs and outputs along

the chain were coordinated and determined by the central command system (Swinnen and

Vandeplas 2008). With the start of the transition process and the introduction of

privatisation and restructuring policies, the existing supply chain structures collapsed. The

vertically integrated chains disintegrated and resulted in a sequence of independent

enterprises at different stages in the chain.

The liberalisation process in a context without pre-existing markets and an imperfect

contracting environment led to disorganisation in production and exchange (Blanchard

and Kremer 1997, Roland and Verdier 1999). As a result, the dismantling of the existing

supply chain structures provided an important piece of the explanation for the dramatic fall

in output during transition.

Dries et al. (2009) find that the simultaneous privatisation and restructuring of farms,

input suppliers and processors caused major disruptions in the exchange relationships in

the dairy chain in a number of countries in Central and Eastern Europe. During

communism, farmers sold their products to state-owned rural collection points. When the

socialist system collapsed these collection stations soon lost their significance and most

went bankrupt. For farmers this meant establishing new ties in the supply chain. The Polish

dairy sector presented a somewhat different picture however. The milk collection points

were owned by the dairy companies and as a result, the ties between farmers and

processors were not disrupted at the start of transition. On the other hand, disruptions did

occur in the market for input supplies, as well as in the marketing of dairy products.

A further implication of the initial reforms was the liberalisation of the dairy market.

Under communism any given processor’s activity was confined to a certain area. That

meant that farmers’ sales opportunities were seriously limited. In the transition period this

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restriction was lifted and producers were allowed to choose between different purchasers.

As a result, the competition for milk deliveries between dairy processors increased

substantially.

Private initiatives lead the way

Changing institutional framework

The second period we distinguish in the transformation process starts in the mid to late

1990s. This period is characterised by the prevalence of private initiatives – as opposed to

the changing public policies that were driving changes at the start of the transition period.

An important feature of this period is the increasing inflow of foreign direct investment

(FDI). Several authors point to the importance of foreign direct investors as initiators of

institutional change in the agri-food sector in Central and Eastern Europe (Gow and

Swinnen 1998, Walkenhorst 2000, Dries and Swinnen 2004). These studies find that

foreign companies implement private standards and innovative contract schemes that

create spillover effects both horizontally (through adoption by domestic firms) and

vertically (by improving problematic vertical relationships) in the supply chain.

The inflow of FDI was also a major driving force in the Polish agri-food sector. The

agri-food sector was the second most important destination of foreign capital in Poland in

this period, after the motor industry (Wilkin et al. 2007).9

The introduction of private standards for milk quality and the implementation of

specific policies by the dairies to improve the quality of milk deliveries can be seen as an

important institutional change that affected the whole supply chain. Several studies (Dries

and Swinnen 2004, Wilkin et al. 2007, Hanf and Pieniadz 2007, Pieniadz and Hockmann

2008) show that Polish dairy companies introduced a number of policies that affected milk

producers. Most of these policies had either a clear quality focus or a clear quantity focus,

or targeted both quality and quantity. For example, dairy processors introduced special

premiums for higher quality milk. On the other hand, dairies often paid premiums for

larger milk deliveries. Sometimes there were also premiums for farmers who owned a

cooling tank.

Hanf and Pieniadz (2007) argue that rising quality requirements are a key driving

force for the redesign of food chains. Based on a case study of 19 Polish dairy

cooperatives, they distinguish three groups of dairies, each of which follow a distinct

quality management strategy. The first group of dairy companies includes processors of

non-branded goods that sell mainly through wholesalers. This group is driven primarily by

a minimum cost incentive. Consequently, processors limit themselves to complying with

the mandatory standards and their relationships with suppliers are restricted to basic

commitments.

In contrast, the second group of dairies does not have strong brands but delivers

products to either a strong retail chain or a highly specialised industrial manufacturer. In

the latter case the dairy company and the manufacturer have close business-to-business

relationships and they carry out relationship-specific investments jointly. This includes the

adoption of new processing facilities but also quality improvement at the production stage.

Dairies that are delivering products directly to a retail chain under the retailer’s private

label are introducing retailer-specific quality schemes. In other words, the implementation

of private standards is much stronger than in the first group of dairy cooperatives. The third

category consists of dairy cooperatives that have their own strong brand. The brand stands

for high quality, and as a result private standards are again a dominant driving force in this

category (Hanf and Pieniadz 2007).

Post-Communist Economies 225

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Changing market and supply chain structures

Following the initial breakdown in relationships at the start of transition, new forms of vertical

coordination–introduced by private companies – emerged and are growing in Central and

Eastern Europe (Swinnen 2006, 2007). Private traders, retailers, agribusinesses and food

processing companies have increasingly contracted with farms and rural households, to

whom they provide inputs and services in return for guaranteed, high - quality supplies

(Swinnen and Vandeplas 2008). Surveys by White and Gorton (2006) of agri-food processors

in five CIS countries found that the share of food companies which used contracts with

suppliers grew from slightly more than one-third in 1997 to almost three-quarters by 2003.

In Poland the private initiatives that prevailed in this period translated into increased

vertical coordination in the dairy supply chain. More specifically, dairies established

resource-providing contracts with their suppliers that included not only product exchange

conditions but also several assistance programmes. These programmes included training

in milking techniques or on veterinary and sanitary issues; consultancy services, low-

interest loans for buying cooling tanks, cattle feed and land, credit to buy machines or

modernise buildings, and the provision of information.

The incentives provided by dairy processing companies to improve milk quality and to

increase milk deliveries have shifted the emphasis from the traditional marketing channel

to a modern marketing channel for milk.10 This means that village collection points are

becoming increasingly rare as ever more farmers own their own cooling tank. While the

average share of the traditional channel in total milk deliveries was still around 68% for

the dairies that were interviewed in 2001, this share had decreased to 46% in 2003 and

28% in 2005. As a result, the relationship between the farmer and the dairy processing

company has become more direct. Figure 1 shows how the share of farmers in the modern

marketing channel has changed based on the two datasets.

The accession process

Changing institutional framework

The accession process put the emphasis of institutional change again on the regulatory

framework and public policy. In the run-up to EU accession several policies were

introduced that affected the agricultural sector, and the dairy sector specifically.

First there were the strict EU requirements with respect to sanitary and veterinary

norms. These included for example the requirement for farms to obtain a veterinary

certificate. At the processing level, dairy companies were required to upgrade facilities in

order to obtain EU authorisation to market their products. Other policies that may have had

a direct impact on the restructuring of the dairy sector were the establishment of a special

direct payment for high quality milk (2002–04) and the system of pre-accession

programmes for agricultural investment like SAPARD.

With the implementation of the Common Agricultural Policy after accession, a number

of additional policies were introduced that affected the dairy sector directly or indirectly.

These included the introduction of market support measures, direct income payments and

supply control regulations, i.e. the milk quota system. In Poland the milk quota system was

implemented on a regional basis. This meant that the tradability of milk quota was restricted

to each of the 16 voivodships (administrative regions). Milk quota trade was possible within

the voivodship but prohibited from crossing voivodship borders.11

Poland’s accession to the EU in 2004 also had several effects on agricultural incomes.

This was caused by increasing agricultural prices and access to the direct income support

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system. In 2005 about 90% of all Polish farmers received direct payments (Wilkin et al.

2007).

Changing market and supply chain structures

The new institutional framework had an important impact on the vertical relationships in

the dairy supply chain. For example, stringent policies related to the quality and handling

of raw materials meant that the introduction of private standards in the previous period had

now been complemented by the enforcement of public standards. As a result, the need for

strong vertical relationships to comply with higher standards is reinforced.

Furthermore, the interviews show that the resource-providing contracts that were

introduced in the dairy sector in the late 1990s still exist after Poland joined the EU.

However, some new elements have been introduced in the assistance programme that

reflect the new institutional framework. For example, dairy companies are now providing

loans to farmers for buying extra quota.

As a consequence of the introduction of market support policies in the dairy sector as

part of the CAP, milk prices have stabilised in recent years. Price differences are therefore

no longer used as tools by dairy companies to attract farmers; as one interviewee states:

‘Nowadays, the only farmers that change dairies are those that have fallen behind with

quality adjustments’ (Wilkin et al. 2007). Even this incentive for changing dairies has been

eroded since 2007 as poor-quality milk can no longer be accepted. As a result, the

relationships between milk producers and dairy companies have become more stable.

On the other hand, accession to the EU has also introduced stronger competition for

domestic dairy companies from within the EU. Hence there is a strong incentive for

0

10

20

30

40

50

60

70

80

90

100

1996

Source: Own calculations based on interviews with dairy processors.

2001 2003 2005

Sh

are

of

milk

su

pp

liers

(%

)TMCMMC

Figure 1. Share of milk producers in the modern (MMC) and traditional (TMC) marketingchannels.

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improved efficiency throughout the chain. One of the implications is a drive towards more

concentration at the level of the dairy processing sector. The next section looks at whether

this dynamic is also transmitted to the level of the farm sector.

Structural change in Polish dairy production

This section reviews the structural changes that have occurred in the Polish dairy sector

using our unique farm level data. According to the interviews, increasing herd size was

seen as one of the main changes at the dairy farm level in the past 20 years. This growth

was the result of several factors: investment in quality improvement required a sufficiently

large herd; extra payments from dairy companies for large deliveries provided an incentive

to increase the herd size, as did anticipation of the quota system from the beginning of the

twenty-first century. This section also presents evidence of change in other structural

indicators – apart from farm size and growth–in the dairy sector.

Farm growth in the Polish dairy sector

Table 1 shows that there is a strong tendency to disappearance of the small to medium-size

farm class in the Polish dairy sector. Between 1996 and 2002 the share of farms with two

to four cows decreased substantially. Since 2007 this disappearing small / medium-size

class has extended to include farms with five to nine cows. In contrast, the share of farms

with only one cow is continually increasing. However, we note that this shift towards

subsistence or semi-subsistence farming has been slowing down in more recent years. At

the other extreme, there is also an increase in the share of larger farms, i.e. commercial

farms with 10 cows or more. The growth in larger farms is apparent in the whole of Poland

as well as in the Warminsko-Mazurskie region.

Table 2 confirms the move towards a bimodal size distribution in the 2001 and 2007

samples. On the one hand we see a strong increase in the share of the smallest farms. On

the other hand, the share of the largest farms (more than 20 cows) is also increasing

considerably in both datasets. In contrast, small to medium-sized farms are becoming less

important. Figure 2 provides a visual representation of the information in Table 2, showing

the percentage change in the number of farms by size category. The bimodal growth

pattern is evident in both datasets.

To gain further insight into the structural changes that have occurred at the farm level,

we define farm growth as

Growthi ¼ðCowsi;tþ5 2 Cowsi;tÞ

Cowsi;t*100 ð1Þ

In other words, growth equals the percentage change in number of cows per farm (i) in

the reference period (from t to (t þ 5)). In the 2001 sample t equals 1995, while in the 2007

sample t equals 2001. Average growth by size category is calculated as the sum of farm

growth rates divided by the number of farms by size category.

Average growth rates are presented in Table 3. The average growth rate of small to

medium-size farms (less than nine cows) is not significantly different from zero in either

the 2001 or the 2007 sample. This means that on average, the positive growth of some

farms in this size group is offset by the negative growth (or decline) of other farms in this

size group. Farms with 10 cows or more have significantly positive growth rates in the

2007 sample. The same holds for the larger farms in the 2001 sample, with the exception

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of insignificant average growth rates in the 15 – 19 cow size group. To test the hypothesis

that average farm growth rates by size category differ between the two samples, we used

an unpaired t-test. This test is warranted because we test means between two independent

samples. The test shows that the null hypothesis of equal sample means in the two datasets

could not be rejected in the different size groups. In other words, the institutional changes

Table 3. Average growth rates by size category.

Size classObservations at time t Avg. growth (%)

2001 sample 2007 sample 2001 sample 2007 sample

1–4 cows 46 17 20.8a 1.55–9 cows 116 66 6.3 11.910–14 cows 93 64 21.3*** 21.1***

15–19 cows 19 25 15.2 15.2**

. 19 cows 13 23 22.2*** 15.9**

Notes: The significance tests test the hypothesis that sample means for average growth in each of the datasetsseparately are equal to zero; ** 5%; *** 1% significance level. Time t equals 1995 and 2001 for the 2001 and2007 samples respectively.a Despite a relatively high average growth rate, we do not find the growth rate in the category with ‘1–4’ cows tobe significantly different from zero. The reason is that this category includes a number of farms that have grownbut also a considerable share of farms that have decreased their herd size or even quit milk production altogether.As a result, the standard deviation of growth in this category is 10 times larger than the average growth rate,explaining the insignificant result.Source: Own calculations based on survey samples.

–100

–50

0

50

100

150

200

1–4 5–9 10–14 15–19 >19

Herd size

Ch

ang

e in

nu

mb

er o

f fa

rms

(%)

1995–2000

2001–2006

Source: Own calculations based on survey samples.

Figure 2. Changing farm size distribution: change in the number of farms by size category in the2001 and 2007 samples (%).

Post-Communist Economies 229

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that occurred in the accession period did not significantly alter average farm growth rates

compared with the previous stage in transition.

On-farm investment and milk yields

Farm growth as it is specified in the previous section, i.e. increasing herd size, can be seen

as a specific type of on-farm investment. However, investment can also be made in other

farm assets. In this section we focus on investment in dairy-specific assets, which include

for example the purchase of a milk cooling tank or the installation of a milking line and/or

milking parlour (see Dries and Swinnen (2010) for a further analysis of on-farm

investment in the Polish dairy sector).

Table 4 summarises investment activity by the farms in the two samples and presents

the share of farms in the two samples that have made at least one dairy-specific investment

in the last five years. About half of the farms in the two samples have made dairy-specific

investments in the reference period (50% in the 2001 sample, 42% in the 2007 sample).

While the larger farms are investing much more intensively in the 2001 sample,

investment activity seems more evenly spread across farm size categories in the 2007

sample.

Investments such as installation of a milking line, acquisition of a feed mixer and

purchase of specialised milk breeds can play an important role in the improvement of milk

yields. Table 5 presents an overview of the change in milk yields on the sampled farms.

First we notice a continuous increase in average milk yields since 1995. The increase in

milk yields is more or less independent of the farm size category in the 2007 sample, with

average milk yields improving by about 10% throughout the sample. On the other hand,

milk yield changes vary more widely over farm size categories in the 2001 sample. The

largest increase in average milk yields is achieved in the large farm group, where average

milk yields increased by 21% and 13% in the 2001 and 2007 samples respectively.

From commercial to semi-subsistence farms

Finally, it is interesting to take a look at the farms that have stopped delivering milk to

dairy companies. Table 6 compares some general statistics between the group of farms that

stopped delivering milk to dairies in the reference periods and farms that continued. First,

we see that the share of farms that stopped milk deliveries over the five year period is

comparable in both samples (i.e. 14% in the 2001 sample and 16% in the 2007 sample).12

Second, Table 6 shows that farmers who left the commercial dairy sector were on average

Table 4. Share of farms with dairy-specific investments in period t to t þ 5 (%).

Size class 2001 Sample 2007 Sample

1–4 cows 28 245–9 cows 37 3910–14 cows 68 3415–19 cows 68 28. 19 cows 85 30Average 50 42

Notes: Dairy-specific investments include the purchase of new cows in the 2001 sample; this type of investment isnot included in the 2007 sample.Source: Own calculations based on survey samples.

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older than farmers who continued. Both samples also show that the farms that quit were

considerably less specialised in milk production and had a larger share of other income

sources in total household income at the start of the reference period. In other words, there

is evidence to suggest that the restructuring of the dairy sector is not only leading to larger

dairy farms but at the same time also to more specialised dairy farms.

On average, farms that have stopped delivering milk were smaller than continuing

farms in both samples. Although the average herd size in the 2007 sample is larger than in

the 2001 sample, we see that farms that quit milk deliveries retain on average two cows in

both samples. This indicates that milk production for self-subsistence purposes remains

common practice in rural areas even after accession. The bottom part of Table 6 shows the

share of farms that stopped delivering milk by size category. It is interesting to see that

Table 5. Change in milk yields.

2001 sample 2007 sample

Size classAvg. yieldltr, 1995

Avg. yieldltr, 2000 % change

Avg. yieldltr, 2001

Avg. yieldltr, 2007 % change

1–4 cows 3039 3039 0 3321 3638 105–9 cows 3219 3383 5 3892 4216 810–14 cows 3502 3775 8 4450 4886 1015–19 cows 3397 3611 6 4258 4727 11. 19 cows 3520 4252 21 4843 5478 13Total average 3335 3612 8 4153 4589 10

Source: Own calculations based on survey samples.

Table 6. Summary statistics of farms that stopped delivering milk to dairy companies.

2001 sample 2007 sampleQuit Continue Quit Continue

Number 41 245 32 164Age of household head 49 44 48 44

% milk in total agr. revenueat time ta

– – 62% 74%

% agr. in total HH incomeat time t

– – 78% 96%

% farms specialisedb in dairy at time t 5% 10% – –% farms with own farm as main source

of income at time t63% 91% – –

Average herd size at time t 5 10 8 12Average herd size at time t þ 5 2 12 2 16

% farms at time t1–4 cows 54% 40% 16% 7%5–9 cows 41% 40% 61% 29%10–14 cows 2% 37% 16% 36%15–19 cows 2% 7% 3% 15%more than 19 cows 0% 5% 3% 13%Total 100% 100% 100% 100%

Notes: at ¼ 1995 in the 2001 sample; t ¼ 2001 in the 2007 sample.b A farm is specialised in dairy production if its only agricultural activity consists of milk and animal feedproduction.Source: Own calculations based on survey samples.

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more than half of the farms that quit milk deliveries in the 2001 sample had an initial herd

size of only four cows or less. In contrast, 61% of the farms that ended milk deliveries in

the 2007 sample had more than four cows at the start of the reference period. This seems to

indicate that the decision to leave the sector is no longer restricted to the smallest farm

sizes, and that an increasing number of medium-size farms are turning away from the dairy

sector. This observation may be linked to the fact that the level of investment that is

necessary to fulfil the sector’s requirements (with respect to quality or quantity) is

increasing the threshold size for making these investments economic.

This is in line with findings of Fałkowski et al. (2009) who show that 30% of farmers

who ended milk deliveries in the 2007 sample saw the decisive factor for this decision as

the low profitability of milk production. Another 21% linked their decision to the lack of

necessary funds for investment. Some 13% mentioned old age and having no successor,

whereas 12% cited the rejection of milk by the dairy on account of low quality.

Furthermore, farmers who decided to quit milk sales were worse endowed with dairy-

specific assets. This manifested itself, for instance, in smaller herds, having cows of poorer

quality or a lower incidence of owning a cooling tank, milking machine, manure storage

site etc. Moreover, only 30% of those who stopped delivering milk had undertaken

investments to satisfy requirements of the dairy processor in the last decade. In contrast,

roughly 80% of those who stayed in milk production had made necessary adjustments. As

a result of this relative underdevelopment, the former group of farmers could not benefit

from premiums for high-quality milk or for delivering larger quantities. Consequently,

they obtained lower milk prices.

Interestingly though, when asked to compare their current financial situation with that in

2001 (i.e. when they still sold milk), only 18% of respondents declared improvement,

whereas 35% saw no change and 38% found their income situation to be worse than before.

On the other hand, about 68% of farmers who continued milk sales experienced an

improvement in their financial situation, and only 6% found that their income had worsened.

Barriers to further restructuring

According to the interviews, one of the most frequently mentioned legal barriers for both

milk producers and dairy processors is the organisation of the milk quota system. The

quota system limits the production per farm and overproduction leads to penalties. An

additional element that counteracted the restructuring of the sector was the quota trade

restriction, which limited the trading of quota to trade within each of the 16 Polish regions.

This resulted in high quota prices, especially in regions where dairy restructuring was

proceeding most rapidly.13 Furthermore, the introduction of direct payments increased

land prices and created a disincentive for farmers to sell their land. As a result, farmers

face increasing difficulties in acquiring land for expansion.

Another barrier to further restructuring of the dairy sector is the co-operative

ownership structure of dairy companies. From the perspective of the farm, this factor

restricts the ability of farmers to switch deliveries to another dairy processor. For dairy

processors the co-operative structure can limit the potential for growth if substantial

investment decisions have to be made; as Pieniadz and Hockmann (2008, p. 49) observe,

‘achieving higher profits in large cooperatives is very likely to be hampered by the

considerable inefficiencies that result from their governance structures’ complexity and

low transparency’.

Representatives of dairies also pointed out that further development at the farm level is

likely to be hampered by producers’ mentality and lack of initiative. Moreover, financial

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education should be promoted in order to improve financial planning. Other production

constraints that were mentioned are the lack of a successor, lack of knowledge, excessive

herd fragmentation as well as a lack of alternative employment opportunities in rural areas.

Finally, drought and other weather inconveniences were also mentioned as a problem,

which may indicate that farmers have insufficient access to appropriate insurance schemes

(Milczarek-Andrzejewska et al. 2008).

Conclusions

This article analysed the restructuring of the dairy sector in Poland after 1989 within three

broad stages of institutional change: the start of transition (early 1990s), a second stage

dominated by private initiatives (roughly mid- to late-1990s) and the EU accession process

(roughly since 2000). In addition, based on two unique datasets, we investigated further

details about the two latter stages.

The initial years of the transition process were characterised by a dramatic decline in

output and productive assets in the dairy sector. Although the total number of producers

both in the milk producing and the dairy processing sector decreased further in later years,

we argue that the second and third stages in the transition period put the emphasis more on

growth and investment than on decline. The increase in average herd size is seen as one of

the main changes in the milk production sector after two decades of restructuring. Two

main factors are behind this development. On the one hand, there is a necessity to invest in

quality improvement and profitable investment often requires a sufficient scale. On the

other hand, farmers are encouraged to increase their herds by dairy companies seeking to

minimise their transaction costs.

The restructuring of the dairy sector resulted in a bimodal size distribution. On the one

hand, we see a strong increase in the share of very small, semi-subsistence farms. These

farms often stop delivering milk to the dairy processor and keep a few cows only to satisfy

the household’s consumption needs. On the other hand, the share of the largest farms

(more than 20 cows) is also increasing considerably.

The gradual increase in average farm size has been accompanied by a continuous flow

of investment in the sector. These investments have not been limited to large dairy farms

as about one quarter of the households with less than five cows interviewed had made

investments related to the dairy operation in the last five years. These investments in turn

brought an increase in average milk yields since 1995, with the average yield increase

becoming even larger in recent years. Again, milk yields have increased in small and large

dairy farms but average yield increase is most substantial in the largest farm group.

There are other interesting differences in structural change between the farm

households that were interviewed in the second and third stages of transition, 1995–2000

and 2001–06 respectively. For example, we find several indications that the necessity to

grow became much more stringent in the years running up to accession (and since

accession) than it was in the 1990s. In other words, farms are under mounting pressure to

invest to keep their dairy operation economically viable. In contrast to the evidence from

the second stage of transition, we find an increasing number of relatively larger farms

turning away from the dairy sector in the third stage.

In conclusion, the restructuring of the dairy sector since the start of transition has been

dramatic. The private initiatives that were introduced by dairy processing companies in the

second half of the 1990s led the way to gradual investment and growth at the farm level.

This process of structural change continued and intensified in the run-up to accession.

However, the accession process also presented the sector with new barriers to further

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restructuring. The milk quota system results in high quota prices in the fastest growing

dairy regions in Poland. Furthermore, direct payments are starting to be capitalised in the

price of land. Both these institutional factors are seriously limiting the future growth

potential of dairy farms, and consequently the dairy sector as a whole, in Poland.

Acknowledgements

This research was funded as part of the Regoverning Markets Project (http://www.regoverningmarkets.org).

Notes

1. See Berglof and Roland (2007) for an overview of policy changes at the start of transition andtheir impact.

2. The first stage of transition is not covered explicitly by our two samples. However, there existsan extensive literature on the initial impact of the collapse of the communist system and theimplementation of reforms on the agricultural sector (see for example Macours and Swinnen(2000) and Rozelle and Swinnen (2004) for overviews).

3. Warminsko-Mazurskie is one of 16 administrative regions in Poland. Following the EuropeanUnion classification (Nomenclature of Units for Territorial Statistics (NUTS)), these regions areat the NUTS 2 level.

4. This is not a panel dataset. The 2001 and 2007 surveys were conducted independently.5. For more details see the description of the 2007 dataset in Milczarek-Andrzejewska et al.

(2008).6. It should be noted that some gminy were overrepresented in the 2001 survey to answer a specific

research question related to the presence of foreign-owned dairy processors. However, researchshowed that the presence of a foreign dairy company did not affect farm size or farm growth inthe area (see Dries and Swinnen (2004) for more details). Therefore, we believe that for thepurpose of this study the two samples achieve a sufficient level of randomness to justify broadcomparisons.

7. Note that at the beginning of each of the two periods our sample includes only commercialfarms. At the end of each period, however, we observe both commercial farms and farms thathave quit their relationship to the market and produce milk only for home consumption. Thishelps to explain the discrepancy between the share of the smallest farms in 2000 and 2001. The2000 figure relates to both commercial and semi-subsistence farms, whereas the share in 2001 isbased only on observations from commercial farms.

8. During the first six years of the market reform the dairy herd declined by about 28%. Asignificant decrease was also observed for milk yields per cow, which declined by more than 4%.Milk production, forced to adjust even further by falling real demand, dropped by 28% to reachits lowest level of 11.3 million tons in 1995 (GUS 1996).

9. It should be noted that the share of FDI in the Polish dairy sector has always been relativelysmall compared with other countries in Central and Eastern Europe. For example, the share ofFDI in the dairy sector in Hungary and Slovakia is around 90%, while in Poland it is only 10–15% (Wilkin et al. 2007).

10. There are different channels for milk collection in Poland. The first channel is what we refer toas the modern marketing channel. The milk is collected directly from a cooling tank that islocated at the farm. In the traditional marketing channel the milk is collected from a collectionpoint where milk from several different farmers is pooled. In the most common form of thetraditional channel, milk is delivered to a village collection point that is owned by the dairycompany. In some cases the collection point is privately owned (often by a farmer) and the costsof managing the collection point are pooled among the farmers who use this marketing channel.

11. The Polish milk quota system was revised recently: since 2009, milk quota trade acrossvoivodship borders has been allowed.

12. These shares are in line with estimates of farm exits based on national statistics.13. As was mentioned earlier, the restriction on milk quota trade across voivodship borders was

lifted in 2009.

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