Cost of Milk Production in EADD

Hubs in East Africa

Baltenweck I, Kinuthia E, Lukuyu B Menjo D, Atyang S and Kamanzi E

Presentation at the EADD Regional Office, 07 May 2012

Outline

Background

Survey objectives

Survey design

Analytical procedure

Results

Conclusion and Recommendation

Background

In East African region, millions of smallholder farmers live in poverty in spite of the

potential to earn well-above subsistence income of $2 a day.

In this predominantly agricultural region of Africa, keeping cattle and selling milk are

common, though not always profitable, household activities. Challenges include

poor breeds, inadequate feeding, poor animal health etc.

Country Kenya Rwanda Uganda

Cattle population 000' 18,000 1,500 12,000

Milk production 000' 4,400,000 97,981 1,190,000

Per capita consumption (ltr) 100 13 55

Dairy contribution to GDP 8% 6% 3%

Survey objectives

Calculate cost of producing a litre of milk in the three

countries and make comparison according to scale of

operation and production system

Comparison of costs and returns

Identify cost components that EADD should target to

enhance profitability

Survey design

Six hubs were selected in each country, 3 representing intensive (mainly stall

feeding) production system and 3 representing extensive system (mainly grazing) in

Rwanda and Uganda. Kenya had 3 hubs representing extensive and 3 representing

semi-extensive system

Sampling plan was to survey a total of 7 small scale farmers and 3 medium scale

farmers (a total of 10) per hub; however, the actual sample size and distribution

were different for some hubs and countries

60 farmers were interviewed in Rwanda and Uganda and 48 in Kenya (128 farmers

in total)

Production Systems Intensive Extensive

Uganda Rwanda Uganda Rwanda

Hubs per system 3 3 3 3

Small-scale farmers 20 21 19 21

Medium- scale farmer 4 9 17 9

Total sample size 24 30 36 30

Production Systems Extensive Semi-Extensive

Hubs per system 3 3

Small-scale farmers 4 12

Medium- scale farmer 18 14

Total sample size 22 26

Rwanda and Uganda sample distribution Kenya sample distribution

Survey design (cont’)

Definition of farmers

Cows owned

Country System Small-scale Medium

Kenya Extensive 1 to 3 >3

Semi extensive 1 to 3 >3

Rwanda Intesive 1 to 3 > 3

Extensive 1 to 10 >10

Uganda Intesive 1 to 3 >3

Extensive 1 to 15 >15

Questionnaire

Structured survey questionnaires were used to collect data using 3 month recall

questions

Data collected include;

Farmer’s personal information

Cattle inventory

Production systems and scale of operational

Milk production and utilization

Cattle management

Cattle prices at various hubs was also collected using a separate questionnaire

filled at hub level

Analytical procedure

Profits were calculated using revenue from milk and cattle sales combined

(option1) and revenue from milk sales only (Option2)

Cost of Milk given to labourers and calves is also include as a revenue because it is a product of the farm

Revenues included in

calculations

Costs included in

calculations

Option 1 1. Milk sales

2. Milk consumed by household

3. Milk given to calves and

labourers

4. Sale of animal

Variable Costs

Fixed costs

Milk given to calves and

labourers

Milk spoilage

Mortality

Option 2 1. Milk sales

2. Milk consumed by household

3. Milk given to calves and

labourers

Variable Costs

Fixed costs

Milk given to calves and

labourers

Milk spoilage

Mortality

Profit Total revenue = - Total cost

Data analysis

Daily

milk

pro

duction in litre

s

Days in milk

Time 0

Milk yield estimation

Estimate of total milk production in the last 3

months preceding the survey was conducted

Regression analysis was done using milk

production against specific time (Time) of lactation

for every lactating cow

The area under the curve (ABCD )was estimated to

get milk yield

This was done for the various breeds and

aggregated for every farmer to get total volume

A

B C

D

Costs

Cattle mortalities

Calculated as value of the herd (obtained from hubs’ market price for different

animal types) multiplied by 8.5%, 1.8% & 7.4% which are mortality rates for Kenya,

Rwanda and Uganda

This was calculated from baseline survey data and apportioned for three months

period.

Depreciation of machines and buildings

Calculated on annual basis and apportioned for three months period

Maintenance of buildings

Calculated on annual basis and apportioned for three months period

Revenues

Milk revenue

Calculated as total value of milk consumed at home, milk sales through various

channels, milk given to labourers and to calves

Milk consumed at home and milk given to labourers and to calves was valued at

respective hub’s price.

Cattle Revenue

Calculated as total revenue of cattle sold in the last three months

Analytical procedure cont’

Partial budget analysis was done to assess how costs and profits are varying

among small-scale & medium-scale farmers under different production systems in

the respective countries

Descriptive statistics were mainly used to quantify means

Significant differences between groups were tested, and comparisons within

countries were done using t-tests

Local currency values were converted to the United states dollar (USD) using

prevailing exchange rates at time of survey.

Currency exchange rates ($1=Kshs 89.4 = RwFrc 577.7 = Ushs 2600)

Comparison of cost, profit and

total revenue

All hubs in Kenya made profits

when total revenue was

considered

In Rwanda, Kigabiro and Muhazi

made losses due to high

production cost which was mainly

driven by purchased feed and

hired labour in the two hubs

In Uganda, Bbale and Kiboga also

made losses while the rest

registered profits and cost was

mainly driven by mortalities

There were more cattle sales in

Ugandan hubs than Rwanda and

Kenya, and this greatly contributed

to the overall dairy profitability

-0.3

-0.2

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Extensive Semi IntensiveExtensiveIntensive Extensive

Kenya Rwanda Uganda

US

$ p

er

litr

e

Profit

Cost

Total Revenue

Comparison of cost, profit and

milk revenue

All hubs in three countries

experienced reduction in profits

when cattle sales were excluded

In Kenya all hubs registered profits

In Uganda, hubs under extensive

production system incurred higher

losses than those practicing

intensive due to significant

contribution of cattle sales to dairy

profitability

-0.8

-0.6

-0.4

-0.2

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Bbale

Extensive Semi Intensive Extensive Intensive Extensive

Kenya Rwanda Uganda

US

$ p

er

litr

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Profit

Cost

Milk revenue

Comparison between production

systems (within countries)

*** ** * significant at 1%, 5% and 10% respectively

Extensive system farmers in Kenya made higher revenue from cattle sales than those

practicing semi extensive system of production

Intensive system farmers in Rwanda incurred higher production cost and consequently made

lower profits than those practicing extensive system of production

Intensive system farmers in Uganda made higher revenue from milk sales while extensive

ones made higher revenue from cattle sales and overall revenue

Extensive system farmers from Uganda were incurring higher production cost than intensive

production farmers due to mortalities. Thus intensive system farmers made higher profits when

revenue was calculated from milk sales only

Kenya Rwanda Uganda US$ Extensive Semi-extensive Sign Intensive Extensive Sign Intensive Extensive Sign Total Milk revenue 0.27 0.28 0.31 0.3 0.25 0.24 *** Cattle revenue 0.12 0.04 * 0.05 0.08 0.08 0.33 ** Total Revenue 0.4 0.32 0.35 0.38 0.33 0.57 * Total Cost 0.16 0.12 0.31 0.13 *** 0.21 0.73 ** Milk Profit only 0.12 0.17 -0.01 0.17 *** 0.04 -0.21 *** Total Profit 0.24 0.21 0.04 0.25 *** 0.12 0.13

Comparison between scale

of operation (total revenue)

Small scale farmers in all three

countries made profits when revenue

was calculated from both milk and

cattle sales

Only medium scale farmers in

Uganda incurred losses and this was

as a result of high mortality cost

Medium scale farmers in Uganda

incurred losses due to mortalities

-0.1

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Kenya Rwanda Uganda

US

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Profit

Cost

Total Revenue

Comparison between scale of

operation (milk revenue)

Profits declined significantly in all

countries when revenue from cattle

sales were excluded

Uganda recorded the highest decline

in profitability indicating significance

of cattle sales

Only Medium scale farms in Uganda

incurred losses when revenue from

cattle sales was excluded

Small-scale farmers in Kenya made

higher profits from milk revenue

compared to Rwanda and Uganda

-0.6

-0.4

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Kenya Rwanda Uganda

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Profit

Cost

Milk Revenue

Comparison between scale of

operation (within countries)

*** ** * significant at 1%, 5% and 10% respectively

Small scale farmers in Kenya made higher revenue from milk and cattle sales then medium scale

farmers and hence higher profits

Medium scale farmers in Rwanda made higher revenues from cattle sales than small scale farmers

and thus higher total profit

Small scale farmers in Uganda made higher revenue from milk sales while medium scale farmers

made higher revenue from cattle sales.

Total production cost was high among the medium scale farmers in Uganda and thus lower profits,

this was mainly driven by mortalities

There was no difference in production cost among small and medium scales in Kenya and Rwanda

Kenya Rwanda Uganda

US$ Small scale Medium Sign Small scale Medium Sign Small scale Medium Sign Milk revenue 0.29 0.27 ** 0.3 0.3 0.21 0.17 ** Cattle revenue 0.12 0.04 * 0.03 0.18 ** 0.17 0.35 * Total Revenue 0.4 0.31 ** 0.33 0.48 * 0.38 0.52 Total Cost 0.13 0.16 0.24 0.19 0.19 0.52 ** Milk Profit only 0.15 0.11 0.06 0.11 0.03 -0.35 *** Total Profit 0.22 0.15 ** 0.09 0.3 ** 0.2 -0.002 *

Cost distribution in Kenya

8%

24%

8%

2% 4% 5% 5%

7%

15%

22%

Small-scale Labour

Feed

Animal health

Breeding

Extension

Transport

Fixed cost

Given out milk

Calf milk

Mortality

10%

24%

11%

4% 1% 3% 4% 5%

11%

27%

Medium scale

6%

23%

13%

2% 3% 4% 3%

10%

7%

29%

Extensive

13%

20%

7%

5% 2% 1%

7%

4%

22%

19%

Semi extensive

Important costs among

smallholders and medium scale

farmers include feeds, mortality

and calf milk

Mortalities, purchased feed and

animal health were the highest

cost components for farmers in

extensive system

Calf milk, purchased feeds and

mortalities were the most

significant costs

Cost distribution in Rwanda

Significant costs among small

and medium scale farmers

include feeds, transport and

hired labour although animal

health was also high among

medium scale farmers

Purchased feeds, hired labour

and transport were significant

among farmers practicing

intensive system

Purchased feeds, hired labour,

and animal health were highest

cost components among in the

extensive system

20%

29%

12%

2%

0%

20%

8%

0%

5% 2% 2%

Small-scale Labour

Feed

Animal health

Breeding

Extension

Transport

Fixed cost

Given out milk

Calf milk

Mortality

Spoliage

34%

14% 18% 1%

0%

14%

7%

0%

6% 6%

0%

Medium scale

23%

27%

11%

2%

0%

22%

8%

0%

5%

2% 0%

Intensive

21%

24%

20% 2%

0%

11%

7%

0%

5%

5% 5%

Extensive

Cost distribution in Uganda

Significant costs among small

scale farmers include feeds,

mortalities and calf milk while

among medium scale was

mortalities

Calf milk, purchased feeds,

hired labour mortalities and

animal health were significant

among farmers practicing

intensive system

Mortalities and purchased

feeds were the highest cost

components among farmers

practicing in the extensive

system

12%

20%

9%

3% 1%

1% 2% 3%

17%

30%

2%

Small-scale Labour

Feed

Animal health

Breeding

Extension

Transport

Fixed cost

Given out milk

Calf milk

Mortality

Spoilage

11%

9%

8% 0%

0%

1% 8% 63%

0%

Medium scale

18%

18%

10%

4% 1% 2% 2%

2%

24%

17%

2%

Intensive

9%

11%

8% 0%

0%

0%

1%

7% 63%

1%

Extensive

Conclusion

Uganda incurred the highest cost followed by Rwanda while Kenya had the least

cost of production.

The most significant costs of production in Uganda included cattle mortality, hired

labour, calf milk and purchased feeds. In Rwanda, they included purchased feeds,

hired labour, animal health and transport costs; while in Kenya, the most important

cost components included cattle mortality, purchased feeds and calf milk

respectively.

Interventions should be devised to address feeds cost in all countries, mortalities

and calf milk cost in Kenya and Uganda. Transport cost should also be addressed in

Rwanda

Rwanda had the highest milk revenue ($0.32 in intensive hubs), while Uganda

trailed ($0.25), Kenya did not have intensive hubs included in the survey for

comparison

Plan for:

Round 2 of CoP survey

Productivity Monitoring survey

Rationale

Cost of milk production data only available for 1 season

Need to collect similar information for at least 1 different season to

estimate yearly costs and profitability

EADD is currently not collecting any data at farm level on a regular basis

The vision indicator of dairy income was measured at baseline, at mid

term, and will be collected at final evaluation

More regular data collection are required to capture trends and

seasonal variation

The cost of production data can also be used to track dairy income

The data can also be used to differentiate 1. farmers selling milk to

hubs; 2. farmers selling milk elsewhere; 3. farmers using hub inputs

and services; 4. any combination of the above

Changes in milk production not monitored, yet this is EADD key

variable of intervention

Even though it’s late to start, ‘better late than never’

Will inform design of M&E system for possible EADD2

Herrerro S (2012). Integrated

monitoring. A Practical Manual for

Organisations That Want to Achieve

Results

Points of discussion

We collect Round 2 of CoP data in same sites and same farmers as Round

1 except Kenya where sampling got messed up

We start cow productivity monitoring

On the same farms as CoP

AND for 10 additional farms in all the other hubs

(this means we will start monitoring milk production on 10 farms in ALL

the hubs)

Besides milk production, we also collect data on milk consumption and

sale (by outlet) and use of hub inputs and services

See draft questionnaire (on milk production only)

Pending issues

Costs (shared between ILRI, Heifer RO and Heifer countries?)

Do we include Rwanda?

Are 10 farmers/ hub sufficient?