An economic analysis of the Kenya milk subsystem
The study was designed with the broad objective of contributing to the understanding of Kenya milk production, marketing and consumption as a subsystem of the Kenyan economy. The specific objectives were to: 1) Analyse the supply of commercial milk from the national dairy herd and project the supply to 1985 under alternative assumptions, 2) evaluate the supply response of smallholder milk production in the Central Province of Kenya using parametric linear programming in order to derive some guidelines for increasing smallholder milk production in the country, 3) determine income and price elasticities through the 'Use of time series data, 4) estimate the consumption of milk and milk products and project the demand of these products using income, population growth and oth~ explanatory variables, 5) analyse the results of supply and demand projections and determine optimal pricing policies; and 6) determine export levels of milk products and assess Kenya's ability to continue as an exporter of dairy products. The data were derived from several sources, including the Central Bureau of Statistics, the Ministry of Agriculture, the Department of Settlement, the Kenya Dairy Board, the Kenya Co-operative Creameries, Co-operative Unions, publications and personal interviews. The methods of analysis included descriptive, regression, and parametric linear programming. Projections of milk supply were made for the period 1978-1985 using alternative assumptions. Time series data were used to estimate the demand equation of domestic fluid milk from which price and income elasticities of demand were computed. The domestic demand for milk and milk products were projected for the perio~ 1978-1985 using the results of the regression analysis, the 1969 household budget survey, and other scenarios. A simultaneous analysis of supply and demand for milk was made to derive projections of dairy exports for the 1978-1985 period. Optimal solutions were obtained by parametric linear programming for a representative farm in each of the three agroeco1ogica1 zones--the coffee, tea and high altitude grassland (HALTG) zone. The generated data were used to estimate a continuous milk supply function for each zone from which price and operating capital elasticities were determined. The results of the supply analysis indicated an annual growth rate of 5 percent. The demand of milk was inelastic with respect to price but elastic with respect to income. The respective elasticities were: 0.65 and 1.18. The export of dairy products were substantial at the low domestic demand projections but they disappeared by 1984 at the high demand projections. The LP analysis reveals that substantial increases in farm incomes could be achieved through a reorganization of production. The percentage increases in farm incomes were -- for the coffee, tea and HALTG zone respectively as compared with actual incomes. The marginal value products (MVPs) of capital were high in all zones implying that increasing this resource would lead to income gains. The MVPs of labor were high in peak periods when hiring of extra labor would increase farm income. Land was an important constraint in the coffee zone. The supply of milk was more responsive to increases in operating capital than to increases in milk prices. The price elasticities of supply were 0.67 for the HALTG zone, 0.18 for the tea zone and 0.38 for the coffee zone. The corresponding operating capital elasticity's were 1.88 for HALTG zone, 1.52 for the tea zone and .61 for the coffee zone. The findings of the analyses provide many insights into the milk subsystem of the Kenyan economy and could be useful in formulation of agricultural and consumer policies.
CitationA Research Paper submitted to the Department of Economics, University of Nairobi, in partial fulfilment of the requirements for the Degree cf Master of Arts in Economics.