The dairy industry is a significant contributor to the New Zealand economy. Improving dairy productivity while meeting appropriate environmental standards is necessary if the New Zealand economy is to grow sustainably. In this paper, a two-stage data envelopment analysis (DEA) technique was employed to assess the combined environmental and economic performance of dairy farms (i.e., eco-efficiency). A sample of 108 farms from a survey carried out in 2011-12 across all regions of New Zealand was used to analyse the eco-efficiency of dairy farms. Survey data on milk solid production was used to estimate economic performance, while data on greenhouse gas (GHG) emissions and nutrient leaching were used to estimate environmental performance. Other information in the survey such as geophysical characteristics and management practices that could indirectly affect the eco-efficiency of the dairy farms was also incorporated in the analysis. In the first stage of our analysis, an eco-efficiency score for each farm was estimated using directional distance function with restrictions in environmental outputs. In the second stage, the effect of the geophysical characteristics and management practices on the calculated eco-efficiency scores were then estimated using an integrated truncated regression and bootstrapping procedure. The results show that, on average, a reduction of 27% in environmental externalities was possible while maintaining the same level of output. GHG emissions, nitrogen leaching, and phosphorous loss were excessive and inefficient. Adopting irrigation and on-farm management practices (e.g., feedpad, in-shed feeding, and wintering-pad) improved efficiency. The few dairy farms located on hilly or sloped land were found to be less efficient than those on flat land. Environmental policies applied to dairy sector have the potential to reduce GHG emission, nitrogen leaching, and phosphorous loss by 3.45 million tonnes, 20,610 tonnes, and 366 tonnes, respectively.