| dc.description.abstract | The objective of this study is to characterise the marketing system in
which smallholder dairy farmers (SDF) in Kenya operate and to examine how
transaction costs (TCs) and market outlet risks (MORs) influence market participation
of the farmers. The study begins with a critical review of the evolution of
the country's dairy marketing policies, right from the introduction of commercial
dairying in the country at the beginning of the 20th century to the period of the
study. Economic actors, including organisations, receive special attention as the
prime instigators of institutional changes. The importance of history in conditioning
future institutional structures makes such a review a fundamental element
in placing the prevailing marketing system in proper perspective.
The review shows that Kenya's dairy industry has been a very dynamic
industry that has evolved as circumstances are altered. Specifically, the review
identifies three major policy turning points, triggered by a great variety of causes
all of which generated conditions that both facilitated and constrained SDF production
and market activities. The review also illustrates that the behavior of organizations
and their relationships with the central administration can set the
conditions for an entire industry's development. It also provides a useful starting
point for the core objective of the 'study, which is based on the analysis of primary
farm- and market- level longitudinal and cross-sectional data using appropriate
statistical and econometric methods.
High perishability and the daily pattern of flow of milk output (at least
within a lactation period), which necessitate repetitive tasks of milk sales activities,
are the principal sources of TCs and MORs associated with sale of milk.
However, while the TCs and MORs inherently arising from these aspects of milk
production and marketing potentially face all dairy farmers, the characteristics
pose greater challenges to the SDF. This is due primarily to quantity constraints
associated with small marketable surpluses and because of market accessibility
problems characterising most rural areas. Analysis of the primary data reveals
that an average SDP in the study area marketed about 9 litres of milk per day and
was located about 4.3 kilometres away from a major road.
Together, quantity constraint and market accessibility are found to have
significant influence on SDF's market participation with respect to choice of
market outlet. The study reveals that the SDP in the study area operated in a
marketing system where: (i) feasible market outlet alternatives varied widely
with accessibility to major roads and consumption centers; (ii) size of household's
marketable surplus played a significant role in influencing both the choice
of market outlet and SDP decisions on whether to sell to cash-sale or to credit
markets, and what proportion of milk to allocate to each; and (iii) unit milk
prices differed widely with market outlet and contractual arrangements with respect
to time pattern of payment.
A price decomposition model based on the ordinary least squares (OLS)
method is used to make comparison of values across the observed modes of
payment. The results present strong evidence that transactions involving regular
payments by fixed schedules offered lower unit prices relative to spot-cash transactions.
In the context of the study, the price differentials are interpreted as revealing
compensating differentials across the contractual arrangements with regards
to market search, market assurance and savings utility. Spot-cash markets
for the highly perishable commodity expose the SDF to greater risks of non-sale.
On the other hand, contractual arrangements involving payments at regular fixed
schedules implicitly define repeat contracts that 'routinize' milk sales/delivery
tasks, offer greater assurance to the farmer for subsequent sales, as well as creating
savings utility. Relative to spot-cash prices, the respective price differentials
indicate the amount (in cash per litre of milk) the SDF were, on the overall, willing
to sacrifice for the benefits of the corresponding flows of payments. The
model results suggest that fortnightly payments attracted by far the largest sacrifice
of 18%, next highest sacrifice (J 0%) was for cash-repeat payments followed
by monthly (7%) and least was weekly payments (5%).
Further analysis suggests that household-specific socio-economic factors
had significant conditioning effects on preferences for the modes of payment.
Results from applications of random-effects logit and Tobit models show that,
ceteris paribus, younger, more educated producers were more likely to accept
sales on credit. Conversely, older producers with more experience but less formal
education were more likely to sell for cash rather than credit. The results
also suggest that the desired liquidity flow was an important criterion for market
choice behaviour. Where liquidity flow was required in lumps to match lumpy
expenditures, on-credit sales were preferred.
A basic conclusion of the study is that smallholder's market-outlet choice
behaviour is not based on the levels of price alone; it is also influenced by some
other important contractual elements of exchange. The study recommends that
comparisons of producer's market-outlet choice behaviour should be based on
sound and objective theoretical and empirical analysis of differentials in benefits
derived by the producer from the different contractual arrangements offered by
the existing marketing system. In particular to milk marketing, this study shows
that a particularly important contractual element relates to the time pattern of
payments.
The findings of the study have important implications for the basic structure
of the first point of sale of milk under liberalized market conditions. Differentiated
producer-preferences for modes of payments, coupled with buyers' need
to mini mise TCs involved in procuring milk from SDF, imply that the first point
of sale of milk will continue to be characterised by a wide range of marketoutlets,
each tailoring its major marketing strategy towards one of SDFs' preferred
modes of payment. This further implies that mode of payment is a potentially
powerful competitive tool as opposed to offering generalised sales arrangements
for all sellers.
Participation of Dairy Farmers' Co-operative Societies (DFCS) seems to
be on the decline. Collective marketing by SDFs nonetheless remains potentially
useful in reducing TCs and MORs. This is clearly demonstrated by a spontaneous
emergence of new organisational forms of collective milk marketing based
on smaller-sized groups of self-selected farmers as opposed to the large-sized
DFCS based on open membership. Such institutional innovation clearly implies
that exogenously prescribed organisational structures may not be as effective and
responsive as farmer-evolved processes, such as learning and incremental
innovations. Therefore, government policy must promote an environment that
induces smallholder farmers to make incremental innovations in organisational
types and governance structures appropriate for the diverse market outlet types
and modes of payment. | en |
