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Efficiency and profitability of the zero-grazing production system in Kenya

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Dairy is an important industry in Kenya contributing about 14% of the agriculture GDP and 4% of the National GDP. It supports more than one million smallholders and plays a critical role in food and nutrition security through milk consumption and increased household incomes. It is estimated that about 80% of milk is produced by smallholders. Due to these factors, in addition to the commercial orientation in the dairy industry in Kenya, the sub-sector has the potential of playing an important role in improving the livelihoods of small-scale farmers hence also contributing to poverty reduction.

However, there are several challenges in the sector including low productivity and high costs of production, which may compromise the extent to which the industry can contribute to these goals. Additionally, the system of production practised may affect performance. As average per household land sizes continue to shrink, many farmers are shifting to zero-grazing system. The zero-grazing system is in many cases also the model of choice by development programs that are promoting dairy production in the country. But does the shift to zero-grazing system come with increased efficiency and profitability? Tegemeo Institute partnered with the Kenya Dairy Board to seek answers to these questions in a recent study undertaken in 20 counties that are important in milk production in the country. Farmers interviewed ranged from those practising zero-grazing to those undertaking open grazing.

Our study finds that zero-grazing is the most efficient production system. Despite expected differences by counties, famers practising zero-grazing have the highest milk productivity at an average of 9.2 litres/cow/day compared to 6.8 litres for semi-zero and 4 litres for the open grazers. Consequently, the zero-grazing system gives the highest per unit revenue on average, translating to KSh 103,773 worth of milk per cow per year. The other systems return KSh 84,430 (semi-zero) and KSh 39,030 (open).

The good outlook of the zero-grazing system dulls however when costs are considered. Our study finds that costs are highest for the zero-grazing system. Without accounting for own factors of production and fixed costs, an average zero grazer spent KSh 62,081 per cow per year, compared to KSh 42,851 for semi-zero grazers and KSh 15,197 for open grazers. This leads to a gross margin of KSh 41,691 per cow per year for zero grazers, closely followed by the semi-grazing system at KSh 41,579, and KSh for 23,832 for open grazing. The high cost for zero grazers hence equalizes their gross margins to those of semi-zero grazers, despite zero-grazing resulting in higher milk production and revenues from milk. The largest direct cost components for zero grazers are feed concentrates and hired labour, contributing 42% and 18% to total costs respectively.

Accounting for full costs of milk production, including own factors of production and fixed costs, we find that profitability of the semi-zero grazing system overtakes that of the zero-grazing system. Full costs of milk production amount to KSh 102,963 per cow per year for zero grazers, KSh 71,076 for semi-zero grazers and KSh 29,090 for open grazers. The zero grazers thus return the lowest profit at KSh 809 per cow per year, versus KSh 13,354 for semi-zero grazers and KSh 9,940 for open grazers. Labour (including family labour) is the largest component of total cost contributing 38% followed by feed concentrates at 23%.

As population continues to increases and average land sizes shrink further, zero grazing may be the only possible production system for majority of small holders in the future. However, this study finds that profits are lowest under this system, due to two reasons. First, the efficiency observed under this system in terms of milk productivity and consequently revenue from milk is not high enough to offset the incremental costs that come with intensification. Even if productivity in some counties is higher, an average productivity of 9.2 litres/cow per day as observed in this study is clearly low for zero-grazing system. Increased productivity would increase profitability substantially. Simulations show that if average productivity is increased by merely 30%, translating to an average of 12 litres per cow per day, profits for zero-grazing would increase to KSh 31,940/cow/year. A productivity increase to an average of 15 litres per cow per day (63% increase), lifts profits to KSh 66,227/cow/year. Clearly, policy measures are required to address low productivity under zero grazing. Adoption of improved breeds, addressing quality issues in feed concentrates, and improved feeding practices are some of the means to achieve this increased productivity.

Secondly, costs are highest under the zero-grazing system since it is the most input intensive system. Possible ways to address the high cost of feed concentrates and labour include addressing feed quality issues, promoting feed formulation at farm-level, lowering tax regimes, and exploring small-scale mechanization.

 

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