This paper develops a non-separable household production model capable of analysing the effects
of the 2003 CAP reform, and especially EU farm payments, on individual Dutch dairy
farms. Model results show that the 2003 CAP reform farm payments do not fully compensate
the income loss caused by the milk price decrease. This implies that savings, and therefore, investment
decreases. Investment shifts away from on-farm investment to off-farm investment.
On-farm investment in milk quotas falls compared to investment in capital and land because
the shadow price of milk quotas decreases relatively to the shadow prices of land and capital
