Profit efficiency of dairy farmers in Kenya: a case study of smallholder farmers in the rift valley and central province

Kenya‟s dairy industry is among the best in the Sub-Sahara Africa. The dairy industry is an important source of household livelihood among the smallholder families. There is immense pressure on land due to the increasing population. The resultant effect on the dairy industry is a rising cost of producing milk by the smallholder mixed farmers who supply over 70% of the total milk consumed in the country. Studies on the economic efficiency of the smallholder dairy farmers are very important in the current production context. This study was conducted in the Rift Valley and Central Provinces of Kenya, while excluding the pastorally dominant cattle keeping communities. A multistage sampling procedure was used to select representative sample of dairy farmers into the study. Cross-sectional data on milk production and utilization in the past three months was collected from the dairy farmers using structured household questionnaires. The study adopted stochastic frontier approach for analyzing and estimating profit efficiency of the dairy farmers. The mean profit efficiency was 68%, and 54% of these farmers were skewed to profit efficiency of more than 70%. The least efficient farmer was 6.5% profit efficient, while the best farmer was 99% profit efficiency. The variance parameters of the stochastic frontier model were also very significant (p-value <0.001), indicating that the composed error term (vi-ui) dominated the measurement error and its distribution is stochastic. A gamma (γ) value of 0.91 was found and the computed variance-factor (γ*) of 0.79 established, indicating a strong evidence of variation from the maximum profit frontier due to inefficient practices among the dairy farmers. Cost of produced fodder by the farmers significantly increased profit efficiency. On the other hand, cost of purchased fodder, conserved feed, water, milk transport and farm maintenance significantly reduced profit efficiency among the farmers. However, of the socioeconomic variables explaining efficiency differences among the farmers, land sizes for fodder and for grazing cattle significantly increased profit efficiency. Efficiency decreased among the dairy farmers with age. Extensive dairy systems were more profit efficiency than intensive farmers. Hired labour, hired land and extension services led to significant decreases in profit efficiency. With an average of 68%, the dairy farmers‟ profit efficiency can be increased by 32% if their technical and allocative efficiencies can be improved. Efficient production technologies can greatly improve cost optimization of the farmers, as well as output maximization per unit input in milk production. Feed technologies commensurate with farmers‟ local conditions are therefore required, as fodder produced on firm has manifested. Institutional policy reforms targeting competitive dairy sector performance approaches are required so as to expand the productivity and profitability of the smallholder dairy farmers given the boosting growing demand for milk in and outside Kenya.