Smallholder farmers produce the bulk of total milk marketed in the country. Despite this, they face high transaction costs in marketing their milk. Theory and empirical evidence indicate that cooperatives can minimize transaction costs. This study assessed how effective cooperatives were in increasing smallholder dairy farmers’ incomes through the minimization of transaction costs. The objectives of this study were to determine socioeconomic factors influencing smallholder farmers to become cooperative members, how effective the cooperative was in minimizing transaction costs and the constraints and strategies for improving dairy cooperatives. Data for this study was collected through a cross-sectional survey in Embu County. Systematic random sampling was employed to select smallholder dairy farmers who are members of the dairy cooperative society while simple random sampling was used for non-cooperative members. The sampled farmers were interviewed using a structured questionnaire. Binomial logit model was used to analyze the socio-economic factors, descriptive statistics analyzed the transaction costs faced and two-stage Heckman model analyzed the effects of cooperatives in minimizing the transaction costs. Constraints affecting dairy cooperatives were analyzed using exploratory factor analysis. The results showed that gender, age, herd size, distance to the market and the cost of transportation influenced farmers decision to participate in dairy cooperatives. Herd size, market satisfaction, amount of milk sold, household income, market access, price information, credit access and extension significantly affected the income received from milk sales thereby reducing the transaction costs faced by smallholder farmers. The study found critical constraints included delayed payments, lack of management skills, stiff competition from hawkers, inadequate milk testing, milk losses due to rejection, lack of target setting, low capital base, general insecurity an limited partnership. The study also came up with possible strategies for improving the cooperative. These strategies were increased and stable milk prices, better management, adequate staff, and timely payments among other strategies. The study recommended increased support programs by the cooperative, local government and national government, and provision of credit facilities and technical inputs to reduce transaction costs faced by smallholder farmers.

Background information 
Agriculture, the mainstay of Kenya’s economy, currently contributes 26 per cent of the GDP directly and another 25 per cent indirectly. The sector also accounts for 65 per cent of Kenya’s total exports and provides more than 18 per cent of formal employment. More than 70 per cent of informal employment is in the rural areas. Therefore, the agricultural sector is not only the driver of Kenya’s economy, but also the means of livelihood for the majority of Kenyan people (GoK, 2010). 

Livestock contributes about 47% of the agricultural GDP and about 12% to the national GDP(FAO, 2005). In Kenya, the term livestock includes cattle, goats, sheep, poultry, donkey and camels. Cattle play a considerable role in the development of the country. In Kenya, farmers keep cattle for beef and dairy purposes. Dairy sector is the second largest contributor to livestock GDP following beef. The dairy sector contributes 14 percent of Kenya agricultural GDP and around 4 percent of total GDP (Muriuki, 2011). In 2008, the estimated milk production was 5.1 billion litres with a total population of 3.5 million heads of dairy cattle (GoK, 2010). Milk production is mainly from cattle with camels and goats accounting for a relatively small percentage. 

Dairy sector provides income to more than 660,000 rural households. The dairy industry is characterized by smallholder producers who produce over 70% of the total milk marketed in the country (Staal, 2004). The main dairy breeds kept in Kenya are the Friesians, Ayrshires, Guernseys, Jerseys and the crossbreeds. In light of this, it can be inferred that dairy’s main role in Kenya’s economy is its contribution to the livelihoods of the many people engaged throughout the value chain and to the nutritional well-being of many rural communities. 

Despite this, the Kenyan dairy sector has not fully realized its potential. The inability of small producers to access markets is a major limitation to harness opportunities in dairy production. The smallholder dairy farmers face very high transaction costs in terms of cost of information search, transportation search, contract enforcement mechanisms, access to credit facilities and weak institutions. There has been a worldwide belief that cooperatives are the appropriate vehicles to reduce transaction costs and facilitate access by farmers to inputs, markets and other vital services (Ortmann and King, 2007). 

The history of the dairy cooperative movement in Kenya is traced back to 1931 when three area based cooperatives; Naivasha, Nanyuki and Kipkelion merged to form the Kenya Cooperative Creameries Limited (KCC). The aim of the merger was to eradicate the creameries competition for the country’s small and weak market. KCC then remains at the base of the evolution of the country’s dairy industry until 1992 (Ngigi, 2005). The Swynnerton plan, 1954 recommended the opening up of commercial dairying to the indigenous people and it became the agricultural revolution, which increased the role of smallholder agriculture in Kenya’s economy. Soon after the country gained independence, it recognized the importance of the cooperative movement as a tool to meeting its rural development objectives. The government subsequently gave KCC monopoly rights as the sole agent in the dairy industry (Atieno and Kanyinga, 2008). A major objective of the policy reforms implemented under the Structural Adjustment Programs (SAPs) was to remove distortion caused by government intervention policies, and consequently improving the efficiency of production and marketing. This saw the privatization of artificial insemination (AI) services in 1987 and liberalization of the milk market in 1992. This led to an increase in private firms and individuals operating in the industry. Cooperatives could no longer afford the once proactive status they enjoyed during the pre-liberalization period, coupled with reduced donor funding, and therefore, had to compete with private firms and individuals in order to maintain their position. Most of the cooperatives were not prepared for this and during this period, there were reports of general mismanagement, misappropriation of cooperative funds, leadership wrangles, corruption among other problems (USAID, 2011). 

This liberalization period saw the collapse of many cooperatives. In 2003, the Ministry of Cooperative development was re-established and some aspects of the cooperative law revised in order to promote revival and better management in cooperatives. A revision of the cooperative societies act CAP 490 in 2012 is the most recent of such measures (KLR, 2012). 

Most of the dairy cooperatives societies are located in the highlands. The bulk of their members are smallholders who, besides keeping dairy animals, grow tea or coffee and other crops. Although the core function of all dairy cooperative societies is milk marketing, they provide to some varying degree other services such as AI, Veterinary services, input provision among other services. The cooperatives charge farmer members for these services on a cost- recovery basis in a cost effective manner that few of their competitor milk buyers can imitate (Owango et al., 1998). 

Statement of the problem 
The dairy sector is the second largest contributor to livestock GDP. Notwithstanding, smallholder dairy farmers still have limited access to guaranteed markets, credit and are faced with high transaction costs in terms of information search, transportation search, contract enforcement mechanisms, access to credit facilities and weak institutions. This makes milk marketing very costly and hence lower profits. The dairy cooperative movement is a viable strategy to help lower transaction costs and hence higher incomes for the smallholder farmers. However, there is limited information on how cooperatives in Kenya improve the incomes of smallholder dairy farmers through minimization of transaction costs. In light of these facts, it is vital to find out the effect of cooperatives in minimizing transaction costs resulting in higher income. This will give an indication as to whether cooperatives are an appropriate solution to dealing with high transaction costs problems faced by smallholder farmers. 

General objective 
The broad objective of this study was to assess the effects of cooperatives on incomes through minimization of transaction costs faced by smallholder farmers in Kenya. 

Specific objective 
i. To determine transaction costs faced by smallholder dairy farmers. 
ii. To determine the socioeconomic factors that influence smallholder farmers’ membership in dairy cooperative societies. 
iii. To determine the effect of cooperatives on incomes through minimizing transaction costs incurred by smallholder dairy farmers 
iv. To examine constraints and strategies for improving dairy cooperative societies. 

Research questions 
i. What are the transaction costs faced by smallholder dairy farmers? 
ii. What are the socioeconomic factors that influence smallholder farmers’ membership in dairy cooperative societies? 
iii. What is the effect of cooperatives on incomes through minimizing transaction costs faced by smallholder dairy farmers 
iv. What are the constraints and strategies for improving dairy cooperative societies? 

Justification for the study 
Dairy production is important to Kenya’s economy. It is a source of income both directly and indirectly and is a major source of nutrition. Cooperatives can play a major role in improving productivity and minimizing transaction costs faced by their members. Since independence, the government has been advocating for smallholder farmers to join cooperatives in order to improve their bargaining power, get access to inputs, trainings and increase productivity. It was also anticipated that the results from the study would benefit the farmers and policy makers in Kenya, specifically in the area of study, by helping them make a more informed, better choice when deciding whether to participate in cooperatives or not, if their goal is to minimize transaction costs. Finally, the study contributes empirically to the literature on transaction cost theory and cooperatives as an institutional arrangement for minimizing cost, in relation to smallholder farmers in a developing country. 

Scope and limitation. 
This research work dealt with smallholder farmers in Embu County. Dairy farmers who had less than five were the target population. The sampling units consisted of households within the Kyeni and Runyenjes Divisions in Embu County. The study focused on Mkulima Bora cooperative society, which is the only operational dairy cooperative society in the region. 

The socio-economic, institution and milk attributes variables to be determined were only the selected variables, but did not include all variables that fell under these areas. The study only extended to the milk marketing activities between farmers and cooperatives. It did not focus on other services that farmers might get from cooperatives such as AI services. The study collected data from both smallholder member farmers and non-member farmers. 

Definition of terms 
Cooperative-A cooperative is an autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly owned and democratically controlled enterprise (ICA, 1995). The seven internationally recognized cooperative principles are voluntary and open membership; democratic member control; member economic participation; autonomy and independence; provision of education, training and information; cooperation among cooperatives; and concern for the community 

Dairy cooperative- A dairy cooperative is a business owned and controlled by the dairy farmers who produce the milk used by the cooperative. 

Institutions – These are rules and norms whether formal (for instance rules set by KDB in selling and buying milk) or informal (such as rules of measuring milk in the villages for instance using cups, rules of measuring the quality of milk for adulteration) that shapes the exchanges in the milk market. They include issues such as how transaction cost affect exchanges, information on milk market, farmer groups and other organizations that are included in the given market. 

Smallholder dairy farmers- These are farmers who own one to five heads of cattle yielding less than 15 litres of milk per cow per day (Muriuki, 2011).

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Item Type: Kenyan Topic  |  Size: 73 pages  |  Chapters: 1-5
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