The dairy sub-sector in Kenya is of particular importance as it provides vital employment, income and nutrition, in an environment where job opportunities are scarce. The subsector markets about 55 percent of the total milk produced but the informal sector accounting for more than 75 percent of all the marketed milk. Large milk quantities are marketed through the informal sector raising questions over the safety and quality of milk products. In spite of the growth of value added milk chains in Kenya, unprocessed milk chains are still dominant. The major milk processors in the country face a challenge of low capacity utilization during dry seasons while during the rainy seasons milk is wasted due to limited capacity. This has led to the growth of small scale milk processors and milk handlers in the country. This study compared marketing margins along unprocessed and processed dairy chains and examined factors that influenced actors’ decisions to upgrade processes, products as well as functions along selected dairy chains. The study employed Probit and Tobit econometric models as well as principle component analysis to answer the objectives. Using a sample of 273 respondents and farmer- based self-help groups, the results of the probit analysis showed that smallholder dairy farmers were more likely to add value to milk if they had value addition skills and if they were members in a value addition group. The results of Tobit analysis showed that participation by smallholder farmers in either the unprocessed or processed milk channel was significantly influenced by distance to the market, the herd size, total farm revenue as well as awareness of standard regulations. In the quest to upgrade the quality of milk, there is therefore need to improve on value addition skills through training and encouragement of participation in collective action. Furthermore, infrastructure in the form of roads, communication and electricity need to be improved to facilitate improvement in the quality of milk.

4.1 Background Information 
Kenya’s economy is largely agricultural. The agriculture sector accounts for 26 percent of the gross domestic product (GDP) and 60 percent of export earnings. The sector directly and indirectly employs more than 80 percent of the population (World Bank, 2009). There are over one million smallholder farmers who contribute up to 75 percent of the total agricultural output and 70 percent of the marketed agricultural output (SDP, 2005) 

The dairy subsector in Kenya is rated as one of the fastest growing subsectors in Kenya, faster than even tea. It plays an important role in the national economy and in the socio- economic development of many rural households in Kenya. It contributes to about 14 percent of the agricultural GDP and 4 percent of Kenya’s GDP as shown by statistics by the Kenya Dairy Board (KDB, 2014). Milk, which is a major product of the dairy sub sector, is valued by many families in Kenya due to its nutritional contribution especially to children. The subsector contributes more to livelihood of many Kenyans through employment, directly and indirectly, along its value chains and to nutrition. The subsector has had tremendous growth over the past years with research showing that for the periods between 2002 and 2010, volumes of milk processed have increased from 144 million litres to 516 million litres while milk production is estimated to be 4.1 billion litres per year (KDB, 2014). This shows that out of the total milk produced per year a very small percentage is processed. Annual per capita milk consumption in Kenya is estimated at 115 litres per individual which translates to an approximate of 5 billion litres per annum. This therefore means that there is limited surplus milk for exports (FAO 2007). 

The Kenyan dairy sub-sector has had significant changes since the industry was liberalized in 1992 (Karanja, 2003).The subsector markets about 55 percent of the total milk produced with the informal sector accounting for more than 75 percent of all the marketed milk (FAO 2011). Since large milk quantities are handled by the informal sector which is unregulated, questions have been raised over the safety and quality of milk products with research showing milk products handled by traders in Kenya having high bacteria levels (Omore et al., 2011). 

Increased safety standards and consumer trusts as well as climate change continue to be a challenge in the dairy sub-sector. Production is costly and characterized by very low input use but this varies according to the degree of commercialization by a farmer. Muriuki (2011) showed that feed represented the largest part of the cost of milk production in Kenya and that there were no effective mechanisms to assure farmers of the quality of feeds in the markets. Research done in Kenya shows that cows are generally underfed, causing low milk production per cow (FAO 2011). 

Kenya’s milk surplus is concentrated in regions where milk production is high and much of the milk not absorbed into informal and formal channels goes to waste for lack of storage facilities. According to 2009 statistics, there were 52 milk processors in Kenya of which only 34 were active (FAO 2011). The major milk processors face the challenge of capacity utilization of as low as 40 percent with most of the processors constantly looking for new milk sources to fill processing plants to capacity (Technoserve, 2008). Other actors involved in the marketing of milk are distributers and retailers. 

A value chain perspective shifts focus of agriculture from production alone to a whole range of production activities from designing to marketing and consumption. Many policy makers have emphasized the need for developing a market oriented and market led opportunities along the entire value chain ( (USAID, 2010), (IFAD, 2010), and (UNIDO, 2009a). Production driven by demand requires improved market literacy of producers as a prerequisite for access to niche markets e.g. supermarkets (Reardon, et al., 2004) but this remains a challenge for small scale farmers. 

Upgraded value chains are characterized by high technological capabilities, skills and specialization. Dairy products from these chains are pasteurized and packaged before marketing thus tend to serve niche markets, such as supermarkets, which are characterized by stringent standards for quality. According to (Giuliani, Pietrobelli, & Rabelloti, 2005) traditional manufacturing industries are characterized by a low degree of technology use. Traditional processes such as boiling and fermentation of milk are some of the ways in which participants in the dairy value chain use to add value to the milk products (Makita et al., 2011). 

According to (UNIDO, 2009b) upgrading involves increasing technological know-how and management abilities of the involved parties so as to enable effective participation in value chains. Upgrading a value chain therefore means not only acquiring knowledge and technologies, but at a faster pace than other actors in competing chains so as to have a competitive edge. There is therefore a need to shift focus and study the unprocessed milk and processed dairy chains and ways of improving processes, products as well as functions. Traditional value addition have opportunities to increase volumes of milk marketed with less stringent standards (UNIDO, 2009b) and comprise of majority of smallholder farmer thus giving opportunities for broad-based rural development. It is therefore imperative to study the two value chains, compare marketing margins and characteristics and identify the key drivers of upgrading decisions along the dairy channels in terms of specific factors in each selected value chain. 

Statement of the problem 
Research shows that consumers are willing to pay for high quality and safe milk products, hence the reason for increased demand for value addition. Varieties of dairy products, to suit different needs by consumers, have emerged in the Kenyan market necessitated by changes in taste, increase in income and exposure. Despite this, unprocessed milk is still dominant in the market indicating minimal value addition is done. 

The unprocessed milk and processed milk value chains may offer different opportunities for development and improvement of the overall dairy sub sector, however, little has been done in terms of characterizing and comparing the unprocessed milk value chains with the processed dairy value chains. It is not clear whether the marketing margins received by actors from unprocessed milk and processed marketing channels differ hence this research proposes to provide this information. There is no sufficient information on factors that influence upgrading and participation decisions by actors along unprocessed and processed dairy chains in Kenya; hence opportunities for efficiency and development that are available in the dairy value chains have not been sufficiently explored. 

Objectives of the study 
General objective 
To contribute towards improved value addition and marketing of milk by smallholder dairy farmers and market agents 

Specific Objectives 
1. To characteristics processed dairy chains and unprocessed dairy chains in Meru and Uasin Gishu counties 
2. To analyze the determinants of smallholder actor’s participation in unprocessed milk value chains and processed dairy chains in Meru and Uasin Gishu Counties 
3. To compare the cost structures and marketing margins along processed and unprocessed milk marketing channels in Meru and Uasin Gishu Counties 
4. To determine the factors that influence the decisions to upgrade by actors along the selected dairy chains in Meru and Uasin Gishu counties 

Research questions 
1. What are the characteristics of raw milk and value added milk chains in Meru and Uasin Gishu counties? 
2. What are the determinants of smallholder farmer participation in unprocessed and value added dairy chains? 
3. How do cost structures and gross margins vary along raw and value added milk marketing channels? 
4. What are the factors that influence upgrading decisions by actors along raw and value added dairy chains in Meru and Uasin Gishu counties? 

Justification of the study 
Analyzing and examining factors influencing upgrading decisions in the dairy chain allows for identification of interventions along the chain likely to provide improved incomes in line to benefits to low-income households. The identification of information on actor participation, costs, gross margins and, markets, marketing opportunities and challenges can enable formulation of intervention pathways and policies for developing the dairy value chains. The two regions were selected because they had significant production on milk and had potential markets. 

Scope of the study 
The study will only be conducted in Meru and Uasin Gishu Counties along selected dairy value chains and only the actors within the selected dairy value chains and dairy farmers within the regions will be targeted in this research. The research will also be limited to cow’s milk analysis. The two regions were selected because 

Operational definitions of terms
This means acquiring the technological, institutional and market capabilities that allow actors to improve their competitiveness and move into higher-value activities. Actions that upgrade or increase the competitiveness of a value chain can take many forms and include improving product quality through value addition, adding more operations to the value chain, bringing value chain operations into a country from overseas, capturing a new market channel, and entering a separate value chain (new market) with a similar product 
Value added dairy chains: 

These are value chains that handle processed milk from which a wide range of dairy end products are obtained such as yoghurt, ghee and cheese. These processes could either be traditional or upgraded 

Unprocessed milk value chains: 
In this study, unprocessed milk value chain is a dairy chain that handles milk in its raw (fresh) form and no value addition has been made to change the form or taste of the product along the chain 

Value addition: 
Value addition refers to an innovation that enhances or improves an existing product or introduces new products or new product uses 

A vulnerable group: It is a group whose membership includes women, youth, female headed households or HIV/AIDs affected Small holder actors: they are actors along the dairy value chains including farmers who own less than 3 dairy cows, market agents and processors with limited capital investments

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Item Type: Kenyan Topic  |  Size: 75 pages  |  Chapters: 1-5
Format: MS Word  |  Delivery: Within 30Mins.


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