Influence of dairy business models on economic performance and efficiency of smallholder dairy farmers in Nyandarua and Nandi counties

Abstract

With the declining public investments in extension services in Kenya, smallholder farmers are accessing inputs and advisory services from private sector through diverse business models, namely producer organization driven, milk processor driven or direct procuring. However, farmers‟ choice of the business models and their influence on dairy performance and technical efficiency is empirically unclear. Using data from random sample of 246 smallholder dairy farmers in a cross- section survey in Nyandarua and Nandi Counties, this study sought to establish the factors that determine the choice of dairy business models, the effects of the chosen model on dairy performance and the associated technical efficiency. Results from logit model showed farm characteristics as well as institutional factors that influenced the farmers‟ choice of dairy business model were distance to the input market, milk price and access to credit and extension services. Gross margins analysis revealed that the dairy enterprises were profitable and the profitability was 7% to 27% higher in farms linked to milk processor driven model than in direct procuring and producer organisation driven models. However, gross margin per litre of milk did not statistically differ across the dairy business models. The mean technical efficiency of farmers linked to milk processor driven model was 78%, direct procuring (77%) and producer organisation driven (75%). Technical efficiency attained by farmers linked to the three business models did not differ statistically. The efficiency model showed that feeds pasture and fodder land and veterinary services had positive effect on milk output while labour had negative effect on milk output. The use of artificial insemination (AI) as well as the age, education level and primary occupation of the dairy decision maker significantly influenced efficiency. It was concluded that farmers can better obtain credit facilities through producer organisation and milk processor driven dairy business models to improve performance of their dairy enterprises. Innovative dairy business models can play a role in reduction of cost production which impacts on performance of smallholder dairy farms. Promoting the use of artificial insemination can reduce inefficiency in smallholder dairy firms.