Croatia is very close to meeting the requirements necessary for becoming a member of the European Union (EU). On, the European Enlargement Commissioner Olli Rehn said that accession negotiations with are moving ahead well. The agricultural sector and food processing chain are core issues within the negotiation process. Thus, competitiveness of Croatian agro-food products is of high interest for both, EU and, in particular the Croatian farmers. 75% of farms are quite small, with three hectares or less. Not even 5% of the family farms exceed ten hectares.

Dairy production plays an important role in's agricultural sector; with roughly 25% of total revenue, it is the largest sub-sector. Furthermore, 95% of dairy cows are kept in family farms, with an average of about three heads per farm. In view of the importance of dairy production for family farms in, this paper discusses the competitiveness of’s agro-food sector and especially dairy products within the EU market. For the analysis two methods are employed (1) domestic resource costs (DRC) and (2) trade share indicators. The DRC analysis is based on a 2007-survey of dairy farms: farms with less than 16 cows (four on average) and farms with 16 or more (average of 47). The primary data was complemented with trade figures from UNSD for the time period from 2000 to 2007.

The results of the DRC analysis indicate a considerable lack of competitiveness in’s dairy products in terms of past performance and future potential. The DRC value for family farms with less than 16 cows was 3.0, for those with 16 cows and more, it was 2.2. These high figures indicate that all dairy farmers must greatly improve their efficiency. Compared to Slovenian dairy farmers, Croatian milk producer use feed, in an inefficient way. Improvements can especially be made by investing in better breeds and cowsheds. Also, investments will be needed for reaching EU hygiene standards in the coming years. This will put an additional burden on dairy farms for staying in business.

Lack of competitiveness at farm level can be compensated somewhat at the processing level. But this is not the case in. Results obtained by employing trade share indicators show that the processing industry is rather inefficient too. Bulk raw products do not lack as much in competitiveness as processed intermediates and consumer-ready food. This observation is made for trade in agro-food in general as well as in dairy products. With regard to the latter it was found that those having the least depth in processing perform best in trade.

In view of these findings, would be better-off by negotiating the non-adoption of the milk quota scheme. Milk quotas are introduced under high administrative efforts, while it is rather probable that the EU will drop this measure within the coming decade. The introduction of milk quotas would rather hamper structural adjustment as needed in the dairy sector.