We investigate productivity development and its relation to resource reallocation effects in the dairy sector in southeast Germany during the phasing-out of the European Union milk quota. We use a farm level dataset containing financial accounting data for a period of 15 years. Farm-level productivity is estimated by applying a proxy approach recently introduced in the literature. We compare this approach to other estimation approaches as well as an index based analysis. After aggregation we decompose sector productivity into unweighted mean productivity and a covariance term measuring the allocation of resources toward more productive farms. We observe an increase in the covariance term coinciding with a period of rather volatile milk prices. Therefore, we hypothesize that reallocation of production resources due to market deregulation is triggered or even enforced by extreme price levels. We seek to find support for this hypothesis by a regression analysis linking the measure for the potential covariance between resource reallocation and productivity on the one hand and price variability on the other. In this analysis we find some empirical evidence for this hypothesis.