Institute for Development Studies, University of Nairobi
Abstract
In this paper, production, consumption, marketing and pricing of
dairy products in Kenya are examined and discussed. It is argued that there
are severe irrationalities in the pricing of dairy products and that these
have become an important constraint on the industry. At a uniform price
between locations, transport costs are hidden and there is excessive stimulation
to production far from the consuming areas. At a uniform price between
seasons, the far greater production costs in the dry season are not incurred
so that dry season milk shortages (annually, blamed on the drought) are now
regular features. Wet season surpluses are in the meantime enormous, involving
the necessity for substantial processing capacity that remains idle for a good
part of each year. Large financial losses are incurred by the Kenya Cooperative
Creamery (K.C.C.) in the flush season when twice as much milk must be purchased
at the same uniform price. A large percentage of this milk is then used for
manufacturing and sold at a net loss. An excessive consumer price for liquid
milk is meanwhile maintained which severely inhibits the growth of milk
consumption, especially among the poor who would derive the greatest nutritional
benefit from increasing their consumption.
A large part of the additional supplies in the smallholder areas are
going into local consumption. Only when local demand is met at the supply price
to K.C.C. can the surpluses from these areas be expected in the formal market.
At a seasonally uniform producer price the supply fluctuations between seasons
are particularly severe fro these areas.
An alternative milk pricing system is proposed that would recognise
that neither the production costs nor the financial or social value of additional
milk is uniform between seasons and locations. In this system a floor price
would be paid for all seasons with an ex post additional payout depending on the
proportion of milk intake that is sold as fluid milk
