This paper introduces a nonparametric framework for analysing dynamic profit inefficiency and applies this to a sample of Belgian, specialised dairy farms from 1996 to 2008. Profit inefficiency is decomposed into technical and allocative inefficiency. The paper also decomposes profit inefficiency into the contributions of output, input, and investment. Finally, the paper identifies the contributions of technical and allocative inefficiency in output, input and investment. The results suggest substantial profit inefficiency under the dairy-quota system, mainly driven by allocative inefficiency of variable input use and output production.

Agricultural productivity growth can simultaneously increase profit and reduce pollution. Yet, the impact of productivity growth on both has not been quantified. The objective of our study was to develop an approach to quantify the extent to which agricultural productivity growth can increase profit and reduce pollution. Focusing on nitrogen pollution, we applied the approach to a sample of 341 intensive Dutch dairy farms for the years 2006–2017. Using a Bennet–Lowe formulation, we measured economic and nitrogen productivities over time and across farms. We applied Data Envelopment Analysis to determine the potential for productivity growth from reducing economic and nitrogen inefficiencies and assessed the impact on profit and nitrogen pollution levels. Using a two-stage by-production model, we set profit maximisation as the overarching objective to account for the economic production behaviour of farmers. We found that if laggard farmers adopted the best practices of their best peers, they could on average increase annual gross profit by 34% and simultaneously reduce the N surplus by 50% during the time period, which is a win–win situation for farmers and the environment. The magnitude of these gains corroborates the suggestion that productivity growth could be a game-changer for agricultural sustainability.