Institute for Development Studies, University of Nairobi

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 KCC 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 KCC, 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 from these areas. An alternative milk pricing system is proposed that would recognize that neither the production cost 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.