Institute for Development Studies, University of Nairobi

As with a number of other bulky and perishable agricultural commodities, milk has production costs that vary markedly with the season. Following the rains these costs are low, in the dry reason they are far higher. With a price that is uniform between seasons,these cost differences result in enormous fluctuations in milk deliveries depending on the season. Transport and storage costs for milk are high with the implication that location is also an extremely important consideration in pricing. A uniform price between surplus and deficit areas implies large differences in the economic costs of delivered milk, a substantial transport subsidy, and an inappropriate stimulation of production in areas that are far from the market. This paper analyses the issue of milk pricing given the above phenomena including the issue of the local demand for milk within the rural areas. The reasons for the chronic financial crisis of the KCC (Kenya Cooperative Creamery) are evident from the analysis. The use of politicized prices that ignore the economic and technical characteristics of commodity production and consumption is questioned.