COST OF MILK PRODUCTION IN KENYA- ROUND 2 OF THE SURVEY. J.M.K. Ojango, E. Kinuthia and I. Baltenweck

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1 COST OF MILK PRODUCTION IN KENYA- ROUND 2 OF THE SURVEY 2012 J.M.K. Ojango, E. Kinuthia and I. Baltenweck 1. INTRODUCTION East Africa Dairy Development project (EADD) has undertaken a series of farm level surveys in selected sites in Kenya to determine profitability of dairy enterprise. This has been done in different times of the year so as to cover the different seasons. The first round of the cost of milk production survey was conducted between September and November The findings indicated a significant difference in the total profit from dairy production between small and medium scale farmers mainly resulting from revenues generated through the sale of animals by small holder farmers (Table 1). It should be noted that none of the small-scale farmers that participated in the first round of the survey practiced intensive dairy production. When costs and revenues were compared in reference to the grazing system adopted this was either extensive or semi extensive, farmers keeping animals under extensive conditions seemed to make slightly more profits than those using semi-extensive management. This difference was however not significant (Table 2). It was clear that in subsequent rounds of the survey, efforts were required to ensure data was obtained from farmers practicing intensive production systems. Table 1 Mean revenue, costs and profits in medium- and small-scale farms KSh. per litre Small-scale N Medium-scale N Significance 3 Total Milk revenue * Cattle revenue * Total Revenue * Total Cost ns Profit from milk only ns Total Profit * Table 2 Mean revenue, costs and profits in extensive and semi-extensive production systems KSh per litre Extensive N Semi-extensive N Significance Total Milk revenue ns Cattle revenue s Total Revenue ns Total cost ns 1 Revenues used in calculation do not include cattle sales 2 Revenues used in calculation include sale of milk and cattle 1 P a g e

2 Milk Profit only ns Total Profit ns s significant; ns not significant The second round of the survey was conducted in the month of August 2012 and included five sites that were not surveyed during the first round of the survey while one site that was surveyed during the first round was dropped. Climatic changes, changes in economic conditions and other factors affecting profitability all affect revenues and costs associated with the dairy enterprise over time. Therefore the survey was conducted to assess whether the cost of production and profitability of the dairy enterprise has changed since the previous survey, and to identify interventions that EADD should target in order to enhance profitability of dairy production under different types of farming systems adopted by farmers. 2. METHODOLOGY Ten sites were selected for the survey; five from the first round and five new sites within the EADD project areas. As in the first round, in the additional sites, a list of farmers was obtained from every hub and farmers stratified according to scale of operation. A random sample of ten farmers comprising of small scale and medium scale famers was then drawn per hub 3. Small-scale farmers comprised farmers owning three cows and less, while medium-scale farmers were those owning four to twenty cows. A total of 90 famers were interviewed as presented in Table 2 below. Twenty three farmers were drawn from mainly intensive systems while sixty-seven were selected from mainly extensive systems (Table 2). A detailed breakdown of sample size per hub is provided in Annex 1. However not all farmers were included in the analysis due to missing and incomplete data in some cases Table 3 Sample size for cost of milk production survey Production Systems 4 Total Mainly Intensive Mainly Extensive Small-scale farmers Medium- scale farmer Total sample size Milk production Total milk produced by animals in milk on a farm over the three months preceding the survey was estimated from answers provided by the farmers to a series of structured questions. This captured milk produced at the start of the animals lactation, and on the day prior to the interview. Data collated was used to estimate milk yield for every lactating cow by calculating the area under the lactation curve. Individual cow yields were summed up to get total production per household. Details are provided in Annex Revenue computation 3 Threshold was determined by mean cows owned from baseline survey (EADD 2010). 4 Mainly intensive production system included farmers practicing intensive and semi-intensive and mainly extensive system included farmers practicing extensive and semi-extensive system. 2 P a g e

3 Revenue was calculated from the sum of milk consumed at home, milk sales, cattle sales, milk given to labourers and to calves. Within each site, the price of milk sold was determined from the mean of the price of milk sold at various market outlets within the hub (Table 6). It should be noted that not all the farmers within a site provided details on the costs and prices of production. It was thus assumed that within a site, average costs of inputs and prices of products were similar for all farmers. Milk consumed at home, given to labourers and to calves was also valued at respective hub s price. 2.3 Cost computation Costs consisted of variable costs, fixed costs, cattle mortalities, milk spoilage, milk provided to labourers and calves. The farmers were requested to provide information on the number of animals within different age classes that had died on their farms over the last six months. The proportionate mortality within the different animal categories is presented in table 4. Table 4 Percent mortality for different categories of animals over the period of study within all sites Animal Type Mortality rate Bull>3yrs 0% Castrated males >3yrs 3.4% Immature males 0% Dry Cows 2.2% Lactating cows 3.5% Heifers 1.6% Male calves 4.2 Female calves 5.6% The highest mortality within the last six months was among female calves (5.6%), however sampled farmers did not indicate any mortalities for bulls and immature males. To obtain a cost for mortality, the mortality rate was multiplied by the market price for each animal type within the different sites. Information on these prices was provided within the questionnaire. The total cost of mortality within a site was then calculated as the sum of the mortality costs over all animal types within the site. The cost of mortality per litre of milk produced was obtained by dividing the total cost of mortality by the total milk production over the last three months. Fixed costs included depreciation of machines and equipment, buildings and maintenance of buildings. Variable costs comprised hired labour, feeds, animal health inputs and services, breeding costs, extension and milk transport costs. However, cattle purchases were not included in computing expenses. Details of calculations are provided in Annex Analytical procedure Partial budget analysis was used to compute profits from different hubs where profits were defined as the difference between revenues and total costs. Two scenarios were considered in calculating revenues, one which included revenue from the sale of animals from the enterprise, and one in which this was not a factor. These are presented in Table 5. It should be noted that cattle sales are infrequent and therefore comparison of profits with and 3 P a g e

4 without cattle sales was done to provide an insight on variation of the enterprise profitability under the two scenarios. Milk given to calves and labourers was included as both an expense and revenue since it is a product of the farm. Milk sales were valued using prices from the corresponding marketing channels in a project site. The price reported for the hub was obtained as the mean price from the various market outlets in every hub. Milk consumed at home and milk given to labourers and to calves was valued at the same price as that of the nearest hub. Profitability was compared between hubs, farmers scales of operation and production systems. Comparison of mean revenues, costs and profits was done using t-tests to determine whether the means were significantly different. Table 5 Revenue and cost components included in calculations, per option Revenues included in calculations Costs included in calculations Scenario 1 Scenario 2 Milk sales Milk consumed by household Milk given to calves and labourers Sale of animal Milk sales Milk consumed by household Milk given to calves and labourers Variable Costs Fixed costs Milk given to calves and labourers Milk spoilage Mortality Variable Costs Fixed costs Milk given to calves and labourers Milk spoilage Mortality Non-marketed benefits such as draught power, manure used on the farm and benefits derived from cattle as form of savings and insurance were not included in computation of revenue. 3. RESULTS 3.1 Profit per litre from milk and cattle sales Results on the costs and revenues within the different hubs under scenario 1 as detailed in Table 5 are presented in Table 6, while costs and revenues under scenario 2 are presented in Table 7. On average, within all the hubs, farmers obtained a profit from the dairy enterprise when revenues from both milk and the sale of animals were considered. The profit obtained was however variable between the hubs, with farmers in Tanykina obtaining the highest profit (ksh 32.5 per litre) while those in Cherobu obtained the lowest profit per litre (Ksh 3.7). Olenguruone had the highest total revenue per litre but high production cost reduced their overall profitability. It should be noted that no sales of animals were made in Metkei, Sirikwa and Taragoon hubs over the period considered in this survey. 4 P a g e

5 Table 6 Average total revenues, profit and costs across hubs Cherobu N Kabiyet N Metkei N Olenguruone N Olkalou N Siongiroi N Sirikwa N Sot N Tanykina N Taragoon N Price per litre Milk revenue Cattle revenue Total revenue Variable cost Fixed cost Milk given out Calf milk Mortalities Production cost Profit per litre Profit per litre from milk revenue only Farmers from Metkei Sirikwa and Taragoon did not experience change in profitability when only revenues from milk were considered as there were no cattle sales in these hubs. Farmers from other hubs however, experienced drastic reduction in profitability when revenue was calculated from milk sales alone with Olenguruone recording a net loss (Table 6).This shows the significant contribution of cattle sales to profitability of dairy enterprise in these hubs. Table 7 Average milk revenues, profit and costs across hubs Cherobu N Kabiyet N Metkei N Olenguruone N Olkalou N Siongiroi N Sirikwa N Sot N Tanykina N Taragoon N Milk revenue Production costs* Profit per litre *Costs as calculated in table 6 5 P a g e

6 Cherobu Kabiyet Metkei Olenguruone Olkalou Siongiroi Sirikwa Sot Tanykina Taragoon Percent controbution to dairy revenue Percentage contribution of milk and cattle sales to dairy enterprise The proportionate contribution of cattle sales and milk revenues to total dairy revenue in the various hubs is presented in Figure 1. It was clear that within the hubs considered, most of the revenue within the dairy enterprise over the period studied was generated from milk produced. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Cattle sales Milk revenue Hubs Figure 1: Percent contribution of milk sales and cattle sales to dairy revenue across hubs 3.2 Comparison of profits between different types of farmers and production systems Comparison of revenue, costs and profits between the small-scale and medium-scale farmers Differences in costs and revenue due to scale of farming operation are presented in Table 8. Revenues Although total revenue generated within the enterprise did not differ significantly between medium and small-scale farming systems, revenues from milk sales without considering consumed milk was significantly higher for medium-scale farmers than small scale farmers (p<0.01, Table 8). Costs There was no significant difference in total costs between the small and the medium scale farmers (Table 8). It was however interesting to note that small-scale farmers incurred significantly higher fixed costs (p<0.1), while medium scale farmers had significantly higher costs from mortality of animals (p<0.05). 6 P a g e

7 Profits There was no significant difference in profitability between the different scales of farming considered irrespective of whether revenue was calculated using both milk and cattle sales or if it was calculated from milk sales alone (Table 8). Table 8 Mean revenue, costs and profits in medium- and small-scale farms KSh. per litre Small-scale N Medium-scale N T-test Consumed milk *** Milk sales ** Total Milk revenue Cattle revenue Total Revenue Variable cost Fixed cost * Milk given out Milk to calves Milk spoilage Mortalities ** Total Cost Profit from milk only Total Profit Comparison of revenue, costs and profits between mainly intensive and extensive production systems Differences in costs and revenue due to the system of dairy production practiced are presented in Table 9. Revenues Differences in revenue depending on the production system were significant (Table 9). Farmers practicing mainly intensive production generated significantly higher revenues than those practicing mainly extensive production. It should be noted that this difference in revenue accrued mainly from significantly higher revenues from sales of cattle reared under intensive systems (p<0.1) rather than from differences in revenues from the sale of milk. Costs Farmers raising animals under the more extensive production systems had significantly lower fixed costs (P<0.01, Table 9), but incurred higher costs from mortalities than those raising animals under intensive production systems (p<0. 05). The total cost of milk production although slightly lower for farmers practicing extensive production was not significantly different between the two systems. 5 Revenues used in calculation do not include cattle sales 6 Revenues used in calculation include sale of milk and cattle 7 P a g e

8 Profits Although the total profit from the dairy enterprise was different between the two production systems, with those practicing mainly intensive production obtaining a higher profit (ksh 27.3) than those practicing mainly extensive production (Ksh 16), this difference was not significant (Table 9). When only revenue from milk without that from the sale of animals was considered in calculating the profit, the profit from dairying was much lower (Table 9). In this instance, farmers practicing mainly extensive production obtained higher profits (ksh 9.5) than those practicing mainly intensive production (Ksh 5.5). This difference was however not significant. Table 9 Mean revenue, costs and profits in intensive and extensive production systems KSh per litre Mainly intensive N Mainly extensive N T-test Consumed milk Milk sales Total Milk revenue Cattle revenue * Total Revenue * Variable cost Fixed cost *** Milk given out Milk to calves Milk spoilage Mortalities ** Total cost Milk Profit only Total Profit Distribution of costs by hub The proportional contribution of various components to the costs of dairy production within the different hubs where farmers practiced intensive production are presented in Figures Purchased feeds, mortalities, hired labour and animal health were the major drivers affecting cost of production in a majority of the hubs. Mortality rates were high (>20%) in 7 hubs. This was particularly notable in Sirikwa, Metkei and Tanykina hubs where mortality of animals contributed to > 40% of the costs incurred in dairy production. The second greatest contributor to costs of dairy production was costs of purchased feeds. This contributed to >15% of costs in all the hubs except Tanykina where animal health contributed to 26% of the production costs. Feeding milk to calves contributed significantly to the overall costs only in Sot (19%). The EADD project needs to look into interventions to reduce animal mortalities, and the costs of purchased feeds. 8 P a g e

9 2% Distribution of cost in hubs 5% Hired Labour 14% 8% Purchased feed 10% Animal health Breeding 10% 18% 7% 32% Extension 8% Transport 8% Milk given out Calf milk 21% 15% 12% 3% 17% Mortalities 5% 6% Fixed costs 1% 5% 3% 4% 8% 12% 20% 22% Figure 2: Cherobu Figure 3: Kabiyet Figure 4: Olenguruone Figure 5: Olkalou 27% 8% 3% 5% 4% 7% Figure 6: Siongiroi Figure 7: Sirikwa Figure 8: Metkei Figure 9: Sot 6% 14% 10% 24% 14% 5% 42% 33% 3% 11% 21% 1% 25% 9% 2% 5% 2% 5% 15% 55% 18% 2% 10% 25% 20% 5% 2% 3% 3% 4% 10% 0% 33% 5% 4% 6% 4% 4% 19% 1% 37% 22% 10% 1% 6% 41% 26% 6% 0% 2% Figure 10: Tanykina 2% 0% 3% 3% 31% Figure 11: Taragoon 9 P a g e

10 4. CONCLUSION The second round of the survey on costs of milk production in Kenya found no significant differences in total cost of production between small and medium-scale farmers, and between farmers practicing mainly intensive and mainly extensive systems of production. There were however significant differences in individual cost components across systems and scales of operation. Farmers practicing intensive production incurred higher fixed cost than those practicing extensive production, while those practicing extensive production incurred higher costs from cattle mortality than those practicing intensive production. Additionally, revenues generated from milk sales were higher among medium-scale farmers and those practicing mainly extensive production. Cattle sales contributed to more than 20% of the profitability of the dairy enterprise in four of the hubs. A major contributor to the costs of production was a high animal mortality rate. The EADD project needs to enhance efforts geared towards management of animals at different stages of growth in order to reduce cattle mortalities. The reduced proportionate expenditure on animal health within most hubs seen in this survey is an indication that there is improved linkage between animal health service providers and farmers. This needs to be extended to hubs where costs to animal health remain high, notably Tanykina and Olenguruone. The second most important contributor to the costs of production was the cost of purchased feeds. Ongoing efforts by EADD to promote better utilization of locally available feed resources need to be emphasized in order to lower costs of purchasing feeds across hubs and improve feed quality. Use of calf rations also will assist to further reduce the cost that farmers are incurring on milk given to calves. Information on the actual productivity per individual animal within all the systems would assist in determining where the greatest interventions are required in all the production systems in order to improve profitability of dairy production and improve household incomes in the targeted populations. 5. REFERENCES East Africa Dairy Development Project (EADD), Dairy Production and Marketing, March, East Africa Dairy Development Project (EADD), Cost of Milk Production in Kenya, December, P a g e

11 Annex 1: Sample size by hub Hub System Small scale Medium scale Total Cherobu Intensive Extensive Kabiyet Intensive Extensive Metkei Extensive Olenguruone intensive Extensive Olkalou Intensive Extensive Siongiroi Intensive Extensive Sirikwa Extensive Sot Intensive Extensive Tanykina Intensive Extensive Taragoon Extensive Annex2: Three months milk yield estimation Milk Yield Calculation; A regression was done for milk production levels the day preceding the survey and at calving against time, for the different breeds. Lactating cows were grouped into two categories per breed; Those whose current lactation length is greater or equal to three months Those whose current lactation length is less than three months The area under the lactation curve was calculated for these categories to get three months milk yield estimates. Individual cow productions were summed up to get household totals Annex 3: Revenue and cost components included in calculations, per option Option 1 11 P a g e Revenues included in calculations 1. Milk sales 2. Milk consumed by household 3. Milk given to calves and labourers 4. Sale of animal Costs included in calculations Variable Costs Fixed costs Milk given to calves and labourers Milk spoilage Mortality

12 Option 2 1. Milk sales 2. Milk consumed by household 3. Milk given to calves and labourers Variable Costs Fixed costs Milk given to calves and labourers Milk spoilage Mortality Annex 4: Three months total cost computation Cost Variable costs Fixed costs Other costs Components Hired Labour Casual wage Monthly wage Purchased Feeds Purchased fodder/forage Concentrates Minerals Water Animal health Deworming Vaccination Tick control Curative treatments Milking salve Teat disinfection dehorning Breeding AI and Bull services Depreciation Machines Equipment and tools Buildings Other structures Maintenance Buildings Other structures Milk spoilage Milk given to labourers Milk given to calves Cattle mortality 12 P a g e

13 Annex 5: Average variable, fixed and other costs per litre in hubs Cherobu N Kabiyet N Metkei N Olenguruone N Olkalou N Siongiroi N Sirikwa N Sot N Tanykina N Taragoon N Hired Labour Purchased feed Animal health Breeding Extension Transport Milk given out Calf milk Mortalities Fixed costs P a g e