Breeding can result in more output per unit of inputs as well as improved quality of outputs. A genetic-based technical change component is introduced into the Malmquist index, and productivity growth due to genetic and nongenetic factors is estimated for Icelandic dairy farms with quality adjusted output. Only about 4 percent of the productivity growth has been genetic-based. More than a third of this growth can be attributed to better milk quality. Adoption of new nongenetic-based technologies explains most of the productivity growth.