Contents

DECLARATION............................................................................................................................. 3 CHAPTER ONE ............................................................................................................................. 4 1.1 Introduction ......................................................................................................................... 4 Milk production and status of dairy farmers ........................................................................... 4 Milk marketing........................................................................................................................ 5 Kenya situation ....................................................................................................................... 6 1.2 Problem statement ................................................................................................................. 8 1.3 Objectives ............................................................................................................................. 9 1.4 Research questions ................................................................................................................ 9 1.5 Significance of the study................................................................................................... 9

1.6 Limitations of the study ...................................................................................................... 9 1.7 Scope of the study ............................................................................................................. 10 CHAPTER TWO: LITERATURE REVIEW .............................................................................. 10 2.1 Introduction ......................................................................................................................... 10 2.2 Economies of scale of Small scale farmers......................................................................... 10 2.3 Role of cooperatives ...........................................................................................................11 2.4 Factors influencing choice of marketing channels.............................................................. 14 Producer-Customer ............................................................................................................... 14 Producer-Retailer-Customer ................................................................................................. 15 Producer-Wholesaler-Retailer-Customer .............................................................................. 15 Producer-Agent-Wholesaler-Retailer-Customer ................................................................... 15 Product Consideration ........................................................................................................... 16 Market Consideration............................................................................................................ 16 1

Other Considerations ............................................................................................................ 17 2.5 Challenges facing dairy farmers when selling milk. ...................................................... 18

Poor road infrastructure ........................................................................................................ 18 Poor marketing ...................................................................................................................... 19 High costs and unavailability of inputs and support services ............................................... 19 Inadequate use of appropriate technologies .......................................................................... 19 Limited value addition of milk and dairy products ............................................................... 20 2.6 Possible remedies ........................................................................................................... 20

High demand for milk and dairy products ............................................................................ 20 Improved access to support services and technologies ......................................................... 21 2..7 Conceptual framework ................................................................................................... 22

CHAPTER THREE: RESEARCH DESIGN AND METHODOLOGY ...................................... 23 3.1 Research Design ............................................................................................................. 23

3.2 population and sample size ................................................................................................. 23 Population ............................................................................................................................. 23 Sample Design ...................................................................................................................... 23 3.3 Data Collection ............................................................................................................... 24

3.4 Experimental design.......................................................................................................... 25 CHAPTER FOUR: DATA ANALYSIS ........................................................................................ 26 CHAPTER FIVE: CONCLUSION............................................................................................... 29 REFERENCES ............................................................................................................................. 31

DECLARATION

I declare that this is my original work and has not been presented in any other University or College for Examination purpose.

Signature: _________________ Name: ___________________

Date: ____________________________ Registration No. ___________________

The thesis has been submitted for examination with my approval as the University Supervisor.

Signature: ______________________Date: ___________________________

Supervisors Name:_____________________________________________

Title:______________________________________

Department of Business Administration:

CHAPTER ONE
1.1 Introduction
Milk production and status of dairy farmers Kenya's economy is heavily dependent on agriculture. Generally 75% of Kenyans earn their living from farming either directly or indirectly. Kenya has one of the largest dairy industries in sub-Sahara Africa. Development in the industry span over a period of 90 years and have undergone various evolutionary stages.(Dairy industry in Kenya 2005).

However, dairy production in Kenya is faced by a multitude of perceived and often experienced risks, which contribute to high costs of production and low average productivity.((muriuki et al 2003).The rates many farmers are receiving are actually below what they pay for feeds, not to mention labour, fuel and insurance. These are the challenges facing dairy farmers all over the world. According to Umali et al (1994), it's fairly easy to increase the number of cows whenever prices go up. Farmers tend to increase their herds quickly to take advantage of the situation in consistence with the cobweb theorem. The issue of surplus milk pushes the prices of milk down and the inevitable sharp corrections force dairy farmers to thin their herds. We have seen new business models emerge over the last decade for dozens of industries which includes travel, advertising and publishing. All these relying heavily on technology-based improvements in productivity and changes in distribution associated with the Internet. Therefore we may be seeing the emergence of a new business model for small farms, which has delayed the transformation of other industries and continued to rely heavily on commodity pricing and middlemen distributors (Omore et al 1999) .

To survive in such a tight industry, driven in significant measure by increasing economies of scale, smaller producers must be willing to diversify and even move outside existing distribution channels. Some dairies are now moving into higher-value dairy products like yoghurt and cheese. Milk marketing In some cases, the farmers are seeking to sell milk products at farmers markets rather than through conventional retail chains. (Poate et al 1993) argues that increasing numbers of small dairies are selling unpasteurized milk directly to the growing numbers of consumers who are willing to travel to the farms to make purchases. Informal milk outlets are shown to absorb most of the milk from smallholders farmers accounting for over 80% of the total milk sold. Brokers, traders/hawkers, transporters, co-operatives and farmer groups are identified as the most important participants at the rural markets. From the consumers point of view, the shorter the marketing chain, the more likely is the retail price going to be lower and affordable (Mason 1981). This explains why, following the liberalization of the dairy industry, direct sales of raw milk from producers to consumers or through hawkers has been on the increase despite the public health risks associated with the consumption of untreated milk and milk products. Milk producers may not necessarily benefit from a short marketing chain i.e. milk processors may be paying farmers the same price as hawkers. However, farmers sometimes prefer selling milk to hawkers because other factors such as prompt payments and inaccessibility to formal market outlets such as producer co-operatives or lack of nearby milk processing factory (Jaetzold et al 1983). The biggest disadvantage of direct milk sales to consumers by hawkers is the total lack of quality control and the frequent rate of adulteration of milk with dirty water, which is illegal. An efficient milk marketing chain is one which enables farmers to receive at least 50% of the retail price of milk. The average farm gate price of milk is ksh. 25 per litre and varies from ksh.20 to ksh. 30 per litre. Variation of farm gate price is not linked to the quality of the milk. According to Ngigi (2004) it is rather determined by two factors. One is the financial arrangement between the buyer and the seller. The second factor is the geographical location. In areas where livestock rearing is difficult farmers get a better price for their milk. But when the price of the fodder is taken into 5

account, the net income of these farmers is not significantly higher than the income of farmers from other areas. Currently, there are no policies to regulate milk prices at the farm level. The middlemen, contractors, local milk collection, transportation, processed unpacked milk, loose milk, and processed milk are the segments of the dairy value chain. The processed packed milk costs ksh 35 per litre whereas the loose milk costs ksh. 24 per litre. Kangethe (2000) argues that around a third of the total milk produced by the rural farmers flows out to urban consumers and processing industries. More than half of the milk collected by urban traders and processing industries comes from small herd farmers. The farmers decision to sell milk and the amount to sell is clearly poverty driven. Small scale farmers sell milk only because they have no other source of cash income. Milk in urban areas is accessible to common consumers in two ways: loose unprocessed milk and packed processed milk. Each has its own price regime. The unprocessed milk passes through the middle persons before it reaches the urban retailer. The price of milk increases by between one and two shillings per litre at every stage of sale. The hawkers generally have undocumented contracts with farmers for regular milk supply. They pay farmers an average price of ksh. 20 per kg ( Kangethe 2000). The urban retailers deliver milk door to door, by motorbike or sell it in a milk shop to consumers. Farmers are forced to sell milk for cash income. But these market forces operate in a totally unregulated environment where they are exploiting the poor farmers by offering low prices for their produce. There is also no restriction on the quantity of milk that a company can collect from an area. The dairy industry in Kenya is constrained due to a number of factors that include low genetic potential of animals, animal health, improper feeding and housing for animals, transportation and quality of milk. Lack of commercial dairy farms is also a limiting factor to the dairy sector in Pakistan. The current process of collecting milk from a large number of subsistence farmers is time-consuming, costly and prone to adulteration. Kenya situation Kenya's dairy industry is regulated through the Dairy Industry Act, Chapter 336 of the Laws of Kenya, as enacted in 1958. Under the Act, the Kenya Dairy Board (KDB) was established in 6

order to "organize, regulate, and develop efficient production, marketing, distribution and supply of dairy produce in Kenya". Hence the KDB has broad powers over the organization of the dairy marketing system in Kenya. However, over the years, the KDB has limited its operations primarily to the regulation of businesses involved in the processing and distribution of dairy products, at the risk of leaving the industry in the hands of a nationwide co-operative dairy processing and marketing co-operative called the Kenya co-operative Creameries Limited (the KCC), at least up to 1992 when marketing liberalization began to sweep across the industry. Marketing liberalization aims at improving efficiency in resource allocation by facilitating more or less automatic price adjustments in response to market competition through the forces of supply and demand. The rationale is that market competition, over time, should lead to stability in production and consumption. The result is thus expected to be beneficial to the society as a whole. Kaguon et al ( 1997) argue that the most critical step in the liberalization of Kenya's dairy industry was the decontrol of both producer and consumer prices of milk in May 1992, followed by an explicit policy statement that any party interested in getting into dairy processing and marketing business could be licensed, provided that the business premises met the minimum hygiene standard requirements. According to the dairy industry in kenya: the post-liberalization Agenda Karanja (2003) the farm gate milk prices in informal markets are 22% higher than in the formal marketing channel. Cooperatives remain the main channel for collecting milk destined to the formal market. Analysis of marketing margins indicate that players in informal market have lower marketing margins as compared to the formal channel. As such, the informal channel out-competes the formal channel by charging prices that are 48% lower per litre of milk. Furthermore the players in informal markets have devised various methods of assessing milk quality and for screening suppliers. The throughput of processed milk has continued to decline to the extent that by 2001, only 152 million litres was processed. This represents a decline of over 58% as compared to the amount processed in 1993. Equally, only 22% of the installed milk processing capacity is currently being utilized. Furthermore as more firms exit from the market, the milk processing 7

industry is becoming more concentrated with the largest four firms having a market share of 80% in 2001. Despite these structural changes, the real consumer prices have continued to increase while producer prices and their share of consumer prices has declined. Kenya Dairy Board estimates indicate that milk-processing costs are escalating and by 2002 they accounted for about 57% of the price paid per litre by consumers. The cost of packaging material remains one of the major concerns. Farmers have various marketing options at their disposal which include cooperatives, private dairies, vendors, hawkers, middlemen, neighbors, hotels and restaurants. While one area cooperatives may find it hard to penetrate another geographical area framers are free to exercise all the other options. With all these options it have been a common view to see surplus milk go to waste in one country while in another there is scarcity of the same this bringing up the question of the efficiency of these marketing channels.

1.2 Problem statement

There is a difference between the producer and consumer prices which have been attributed to cost of packaging by milk processors. Therefore the blame has been placed on the marketing agencies mainly the cooperative societies and the various marketing channels adopted by farmers in marketing their milk. Most cooperative agencies act like middle men and their main role is to collect and deliver milk to various processors (Karanja 2003). Distribution channels like cooperatives, private dairies, vendors, hawkers, middlemen, neighbors, hotels and restaurants have their advantages and disadvantages and therefore farmers perceive these distribution channels differently. Farmers are free to make choices but all in all the results has always been high consumer prices, low producer prices, scarcity and surplus in different areas and it have been an every year experience in the dairy sector. Previous studies have focused on advantages and disadvantages of these channels of distribution. Therefore there has been no research on what factors the farmers consider while choosing a distribution channel and the challenges they face. Therefore this research sought to fill this gap by exploring the factors that farmers consider while choosing a distribution channel. 8

1.3 Objectives
The objectives of this study were: a. To find out what influences dairy farmers on their choice of a distribution channel. b. To identify the challenges farmers face while choosing a distribution channel. c. To identify the possible remedies to these challenges.

1.4 Research questions

a. What influences dairy farmers in their choice of a distribution channel? b. What are the challenges that farmers face while choosing a distribution channel? c. What are the possible remedies to these challenges?

1.5

Significance of the study

The findings of this research will be useful to various stakeholders like the government through the ministry of co operative development, policy makers and farmers. Farmers will use the information to know the best channels to use when selling their produce to the market. Policy makers and development planners will use it to make decisions related to cost and benefits. The government can use the data and research material to come up with better policies that impact on the co-operative movement. The research material may also be used in planning of cooperative development strategies by the line ministry.

1.6 Limitations of the study

Ideally the research should be conducted countrywide, however the area is too wide to be covered within the time allocated. The constraint will be addressed by narrowing the research to a single county as representative of the whole country. Famers may answer questions with a lot of suspicion thus answering questions incorrectly. 9

1.7 Scope of the study

The research is to be conducted among farmers within Nyeri county.

CHAPTER TWO: LITERATURE REVIEW

2.1 Introduction
This literature review explores the four dominant themes of the research in question .i.e. economies of scale of small-scale farmers, roles of cooperatives, factors influencing choice of marketing channels as well as conceptual framework.

2.2 Economies of scale of Small scale farmers

For markets to effectively serve small holder farmers and the rural poor, it is necessary to strengthen supporting institutions that promote competition and establish mechanisms for contract formation and enforcement (Ndegwa et al 1999). Farmer collective action is an important strategy to strengthen market-supporting institutions in rural areas. Farmer organizations and cooperatives that facilitate business opportunities and market functions therefore play a pivotal role in Kenya. Under enabling conditions, the farmer organizations can facilitate market access to the poor through horizontal and vertical coordination of production and marketing activities. They can help shorten the long and complex marketing channels that prevail in many rural input and output markets by directly linking smallholders with the upper end of the value chain. This can help reduce transaction costs and increase the share of the consumer price reaching small producers. Beca (2010) argues that over 95% of the expenses in dairying business are directly correlated to either land area or cow numbers, the investment per hectare of land buildings vehicles plant & machinery, and other dairy related assets relatively similar across majority of farm sizes. given the high proportion of variable expenses and a similar investment per hectare of land, there are no significant economies. farms with fewer than 150 cows are disadvantaged as a result of the 10

small proportion of fixed expenses that are unrelated to land area or cow numbers, plus the cost to have at least one capable manager in the dairy business. in addition the value of capital infrastructure (housing and dairy in particular) per hectare that is often associated with small farms disadvantages these business. He further argues that there are normally losses in efficiency once the owner/operator is substantially removed from the interface between cows pasties and supplements, which is likely to occur when more than 800 cows are being farmed. This loss of efficiency is due to the complexities of managing pasture based dairy businesses and hence the influence of the person physically managing this entrance. This can at tines be offset by the lower value of capital infrastructure per hectare that is sometimes associated with larger farms. As a result of the comparative disadvantages of either small or large farms the most economical size is between 200 and 750 cows. It would also be reasonable to conclude that dairy business owners should strive to produce more milk and therefore grow their business over time. The need to grow a business over time is unrelated to any potential economies of scale. This alternative business principle is that productivity improvements are necessary for industries to remain competitive part of improving productivity is to increase milk production over time (Karanja et al 2003). One way to achieve these economies of scale is through cooperatives

2.3 Role of cooperatives

The role of cooperatives cannot be underestimated in any farming research in Kenya. Cooperatives in the country are grouped into agricultural co-operatives (including marketing), financial (SACCOs), Service (Housing & Insurance), and consumer co-operatives (Magola, 2008). The movement cuts across all sectors of the economy including agriculture, finance, livestock, housing, transport, construction, and manufacturing. The concentration is however within the agricultural sector and finance. By 2007, there were 11,635 registered co-operatives in Kenya with at least 7 million members2. About 4,414 of these are agriculturally based, with 3,037 being agricultural marketing co-operatives, [Kenya National Bureau of statistics (KNBS), 2007]. 11

Statistics further indicate that by 2006, there were 245 dairy co-operatives in Kenya. Some of the core functions of marketing co-operatives in Kenya include marketing of members produce (over 76% of dairy produce are marketed through co-operatives), facilitating production through extension service, provision of financial services and advocacy on behalf of members. This puts marketing co-operative societies not only as a prime organization in the heart of the rural society, but also in competition with business and non business organizations for resources and markets. The ability to remain competitive in such an environment depends on its adaptability as influenced by practices; leadership, management, technology, infrastructure and principles as part of a wider organization. Ngigi (2004) However notes that, because of liberalization and globalization other players have since come to provide the services that were once a preserve of co-operatives like farm input & credit provision, commodity bulking, commodity processing, transportation and even marketing. Co-operatives are therefore faced with stiff competition and struggle to retain members. This calls for change of strategy to include going beyond the ordinary conventional services and improving service delivery/customer satisfaction, diversification, joint venture and to operate as specialized business entities rather than welfare organizations Other strategies that create competitive advantage could include mobilizing own resources to fund their activities, adoption of appropriate technology including value addition, improving leadership capacity, improving their service delivery system to be at par with the other players in the market, adequately meet the consumer needs, and to enhance profitability and competitiveness. The issue of market driven products and ability to compete in the market effectively is critical for their survival. A call for business orientation and finding ways to enhance organizational survival and to maintain profitability not only in the management but among membership is therefore key(Jaetzold et al 1983). Overall, co-operatives operation must be focused on effectively

supporting/ performing the functions of credit provision, marketing, input supply and other services to reduce farmer production costs, increase yields, raise incomes and induce savings and capital accumulation with more efficiency and effectiveness for maximum customer satisfaction more than ever before. This calls for co-operatives to adopt effective business and management

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practices beyond the co-operative principles and legal requirements if they have to realize any growth and remain competitive in the global market ( Kibuka 2011). Kibuka(2011) further notes that two major factors that have shaped the development or performance of co-operative sector in Kenya in the recent past include liberalization and globalization. Until the liberalization of the Kenyan economy, cooperatives were heavily controlled by the government that determined the scope of operations and regulations within which they operated. Government withdrew from supporting and supervising co-operatives in 1992 which caught the co-operative leadership inadequately prepared to effectively steer their organizations for growth or face the stiff competition occasioned by liberalization/ globalization. Cases of inadequate management skills, corruption, leadership wrangles, misappropriation of society assets and general mismanagement started creeping in. Thus, prior to the reestablishment of this Ministry in 2003, the co-operative movement was faced with a lot of challenges with many societies almost collapsing due to mismanagement, anarchy and leadership wrangles. This scenario was attributed to the inadequacies of the Co-operative Societies Act No.12 of 1997. According to (Ministry of Livestock Development 2008 )Most of marketed milk production in Kenya is from small scale farmers. By the very nature of their operations, small-scale milk producers have found it necessary to organize themselves into dairy cooperatives in order to be able to supply their raw milk to the KCC and the other market outlets in the high potential milk producing areas of Kenya. Hence the predominance of cooperatives in dairy marketing in Kenya. According to Central Bureau of Statistics (1999) There are over 100 primary societies that are registered as dairy cooperatives in Kenya, but only about 70% of them are functional. In addition, there are over 200 multi-purpose cooperatives which undertake dairying as one of their main activities in the country. These cooperatives serve their dairy farmers by collecting milk from the members, bulking it and either distributing and selling it as wholesome raw milk within the surrounding areas, or by transporting and supplying it to the milk processing plants or collection centers of the KCC. An exception to this general practice would thus be the dairy

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cooperatives in Meru and Bungoma districts that collect and supply their members' milk to their own processing facilities. Birchall in his article Cooperatives and the Millennium Development Goals (2009) argues that challenges impacting operations of dairy farmers co-operatives in Kenya today include poor application of co-operative principles; problems of governance, inadequate skilled human resource, weak regulations and supervision, ineffective control systems, limited products and services, low marketing; stiff competition, increased production and marketing costs, poor quality produce hence low produce prices and lack of innovation and low adoption of technology (value addition) and poor co-operative image.

2.4 Factors influencing choice of marketing channels

Kotler, & Armstrong, (2001) have defined a channel of distribution as the path or route along which goods move from producers or manufacturers to ultimate consumers or industrial users. In other words, it is a distribution network through which producer puts his products in the market and passes it to the actual users. This channel consists of producers, consumers or users and the various middlemen like wholesalers, selling agents and retailers (dealers) who intervene between the producers and consumers. Therefore, the channel serves to bridge the gap between the point of production and the point of consumption thereby creating time, place and possession utilities. He adds that A channel of distribution consists of downward flow of goods from producers to consumers upward flow of cash payments for goods from consumers to producers and flow of marketing information in both downward and upward direction. An entrepreneur has a number of alternative channels available to him for distributing his products. These channels vary in the number and types of middlemen involved. Some channels are short and directly link producers with customers. Whereas other channels are long and indirectly link the two through one or more middlemen. These channels of distribution are broadly divided into four types Producer-Customer This is the simplest and shortest channel in which no middlemen is involved and producers directly sell their products to the consumers. It is fast and economical channel of distribution. Under it, the producer or entrepreneur performs all the marketing activities himself and has full 14

control over distribution. A producer may sell directly to consumers through door-to-door salesmen, direct mail or through his own retail stores. Big firms adopt this channel to cut distribution costs and to sell industrial products of high value. Small producers and producers of perishable commodities also sell directly to local consumers. Producer-Retailer-Customer This channel of distribution involves only one middlemen called 'retailer'. Under it, the producer sells his product to big retailers (or retailers who buy goods in large quantities) who in turn sell to the ultimate consumers. This channel relieves the manufacturer from burden of selling the goods himself and at the same time gives him control over the process of distribution. This is often suited for distribution of consumer durables and products of high value. Producer-Wholesaler-Retailer-Customer This is the most common and traditional channel of distribution. Under it, two middlemen i.e. wholesalers and retailers are involved. Here, the producer sells his product to wholesalers, who in turn sell it to retailers. And retailers finally sell the product to the ultimate consumers. This channel is suitable for the producers having limited finance, narrow product line and who needed expert services and promotional support of wholesalers. This is mostly used for the products with widely scattered market. Producer-Agent-Wholesaler-Retailer-Customer This is the longest channel of distribution in which three middlemen are involved. This is used when the producer wants to be fully relieved of the problem of distribution and thus hands over his entire output to the selling agents. The agents distribute the product among a few wholesalers. Each wholesaler distribute the product among a number of retailers who finally sell it to the ultimate consumers. This channel is suitable for wider distribution of various industrial products. An entrepreneur has to choose a suitable channel of distribution for his product such that the channel chosen is flexible, effective and consistent with the declared marketing policies and pro grammes of the firm. While selecting a distribution channel, the entrepreneur should compare the costs, sales volume and profits expected from alternative channels of distribution and take into account the following factors. 15

Product Consideration The type and the nature of products manufactured is one of the important elements in choosing the distribution channel. The major product related factors are; Products of low unit value and of common use are generally sold through middlemen. Whereas, expensive consumer goods and industrial products are sold directly by the producer himself. Perishable products; products subjected to frequent changes in fashion or style as well as heavy and bulky products follow relatively shorter routes and are generally distributed directly to minimize costs. Industrial products requiring demonstration, installation and after sale service are often sold directly to the consumers. While the consumer products of technical nature are generally sold through retailers. An entrepreneur producing a wide range of products may find it economical to set up his own retail outlets and sell directly to the consumers. On the other hand, firms producing a narrow range of products may their products distribute through wholesalers and retailers.A new product needs greater promotional efforts in the initial stages and hence few middlemen may be required. Market Consideration Another important factor influencing the choice of distribution channel is the nature of the target market. If the market for the product is meant for industrial users, the channel of distribution will not need any middlemen because they buy the product in large quantities. Short one and may as they buy in a large quantity. While in the case of the goods meant for domestic consumers, middlemen may have to be involved. If the number of prospective customers is small or the market for the product is geographically located in a limited area, direct selling is more suitable. While in case of a large number of potential customers, use of middlemen becomes necessary. If the customers place order for the product in big lots, direct selling is preferred. But,if the product is sold in small quantities, middlemen are used to distribute such products.

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Other Considerations There are several other factors that an entrepreneur must take into account while choosing a distribution channel. A new business firm may need to involve one or more middlemen in order to promote its product, while a well established firm with a good market standing may sell its product directly to the consumers. A small firm which cannot invest in setting up its own distribution network has to depend on middlemen for selling its product. On the other hand, a large firm can establish its own retail outlets. The distribution costs of each channel is also an important factor because it affects the price of the final product. Generally, a less expensive channel is preferred. But sometimes, a channel which is more convenient to the customers is preferred even if it is more expensive. If the demand for the product is high, more number of channels may be used to profitably distribute the product to maximum number of customers. But, if the demand is low only a few channels would be sufficient. The nature and the type of the middlemen required by the firm and its availability also affects the choice of the distribution channel. A company prefers middle men who can maximize the volume of sales of their product and also offers other services like storage, promotion as well as after sale services. When the desired type of middle men are not available, the manufacturer will have to establish his own distribution network. All these factors or considerations affecting the choice of a distribution channel are inter-related and interdependent. Hence, an entrepreneur must choose the most efficient and cost effective channel of distribution by taking into account all these factors as a whole in the light of the prevailing economic conditions. Such a decision is very important for a business to sustain long term profitability. According to( Njarui 2010 )the milk distribution follows the following channels as illustrated in the table below.

17

2.5 Challenges facing dairy farmers when selling milk.

Poor road infrastructure The poor state of the roads is one of the major challenge facing the farmers (muia et al2011) . During the rainy seasons, most of the roads are usually impassable particularly in the upper 18

highlands with firm clay and clay loam soils hence farmers are unable to sell their farm produce. Due to the poor road network and long distance to markets, cost of transportation is usually high rendering smallholder dairy production uncompetitive. Poor marketing Most of the milk produced during the wet season is not marketed due to the poor road network and long distance to the markets. Since milk is highly perishable and farmers do not have the means to invest in milk cooling equipments, the high volumes of milk produced during the wet season is therefore associated with high-post harvest losses. According to June(2010) only about 35% total milk production was marketed through the formal sector which is considered by farmers to be more reliable in terms of milk prices and payments for milk delivered than the informal sector. This is mainly due to low milk processing capacity of the formal sector. As a result, the only alternative is for farmers to sell the surplus milk through the informal sector at lower prices. High costs and unavailability of inputs and support services The increased costs of transportation and distribution systems due to the poor road network and long distance to markets results in high costs of inputs (supplements, animal drugs and vaccines, pesticides, fertilizers, and herbicides) and their unavailability. In addition, the high costs of other services such as AI, animal health, electricity supply, extension and training, and credit has a negative impact on dairy development . High cost and unavailability of electricity in rural areas reduced investments especially in cold storage facilities and processing of the highly perishable goods such as milk and dairy products(okwenye 1992). The cost of credit, limited use of land as collateral for financing farming, and the limited number of banks in the rural areas are some of the factors that make it difficult for farmers to access credit from formal banking industry. Inadequate use of appropriate technologies The high cost and inaccessibility of AI services causes about 60% of the households to use natural breeding methods and hence were unable to sustain genetic improvement(muia et al 2011). Natural breeding method results in genetically inferior animals due to inbreeding and the use of bulls of inferior genetic potential negatively affects performance of the offspring. On the 19

other hand, since improved fodder production and conservation are low, the dairy stock relies mainly on inadequate and poor quality natural pastures with low levels of supplementation. The poor adaptability of common fodders and grasses due to low temperatures and frequent frost in upper highlands and frequent drought in lower highlands results in shortage of animal feeds and hence the farms are overstocked. Limited value addition of milk and dairy products Fresh raw milk is highly perishable, milk losses along the informal value chain are high due to spillage and spoilage as a result of poor road network, long distance to markets, inadequate refrigeration, and lack of milk collection due to glut in the wet season. According to muia et al(2011), due to inadequate regulations, poor hygiene of milk at all levels of production and marketing is a common problem. Consumption of fresh milk is therefore associated with health risks since it is an excellent media for bacteria. Failure to meet international food-safety and

quality standards due to the domination of milk marketing by the informal sector hampers efforts to participate in regional and international markets resulting in low milk prices and hence suboptimal dairy production.

2.6 Possible remedies

High demand for milk and dairy products Due to the low consumer prices, fresh milk can be marketed among the populous poor urban dwellers and the milk deficit rural areas. On the other hand, the increases in disposable income, and changes in consumer preferences (tastes) among the urban dwellers creates a high domestic demand for high value food items such as milk and milk products creating market opportunities for indigenous production(dobson 2004). In addition, due to the large regional markets which have arisen through regional integration (East African Community, Common Market for Eastern and Southern Africa, African Growth Opportunity Act, World Trade Organization, African Caribbean and Pacific) and the preferential treatment provided to products from member countries there is great potential to improve smallholder dairy production and marketing in this area. Full exploitation of the existing and emerging milk and dairy product markets will broaden 20

trade and income base for the farmers. To effectively exploit these opportunities, the main challenges will be to improve quality and safety, increase efficiency and competitiveness in production and marketing of milk and dairy products. Expansion and improvement of road network . A lot of emphasis in improvements and expansions of the road network should be directed towards upgrading of the feeder roads which link the farms to the milk collection cent res. Upgrading of the feeder roads which are impassable during the rain season will significantly increase the collection and marketing of milk from farm(muia et al 2011). Fast transportation and marketing is important due to the perishable nature of milk and its products. Also, transportation of inputs and other dairy production support services would benefit from expanded and improved road network. The road network can be improved and expanded not only by the central government but also by local communities through innovative partnerships including those with the private sector. Marketing developments The higher preference by consumers for raw milk as compared to processed milk, provides an opportunity for the informal sector and hence the smallholder dairy production system to be competitive. The formal sector which is involved in milk processing, value-addition, increasing shelf-life, and packaging to ensure safety of milk and dairy products is mainly in the hands of public and private milk processors(okwenye 1992). The sector has the capacity to increase milk intake, processing and packaging to cope with large volumes of milk during the wet season. However, the strategies for implementation must be participatory involving public and private sectors and relevant stakeholders. In addition, an enabling environment by the government through a legal and regulatory framework and strong institutions will be required to support the development of the sector. Improved access to support services and technologies The various farmer co-operatives, self-help groups, private processors, and other partners can be used to provide support services for dairy production in the study area. With improved and expanded road network, there is a great potential to increase access by farmers of essential dairy 21

production services and technologies. Increased use of AI, extension, animal health, training, and credit services will enhance the use of modern farming inputs and appropriate production technologies and hence increase dairy productivity(June 1992). The supplementation of dairy stock must be practised judiciously depending on the basal diet offered and the desired level of production. Training of farmers and the other participants who are involved in milk value chain will have a positive impact on adoption of appropriate technologies hence higher dairy productivity.

2..7 Conceptual framework

It can be recognized that factors affecting choice of distribution channel may be varied depending from the type of product market consideration, ability of farmers to come together and achieve economies of scale and membership to cooperative society. While research has been carried out in identifying the channels no research that have been done to determine the factors that influence farmers in choosing these channels and therefore the researcher seeks to fill this knowledge gap. Capability of Buyer to purchase large quantities of milk High milk prices Prompt payment loyalty Personal Relationships quality Physical proximity Easy collection procedures Provision of other benefits eg animal feeds Timing of milk collection Assurance of payment

Choice of channel

Pending commitments e.g loans

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CHAPTER THREE: RESEARCH DESIGN AND METHODOLOGY

This chapter outlines the steps to be used by the researcher to gather relevant information that will be useful in bridging the identified research gap. It gives the systematic research procedures that are going to be used in the collection and analysis of data, the sample size and the instruments or tools to be used in data collection.

3.1 Research Design

The study utilized a descriptive case study approach in order to report on factors farmers consider while choosing a distribution channel. Descriptive study was useful in identifying and describing factors influencing different variables and the motivations thereof. The study described and explained channels of distribution and their challenges.

3.2 population and sample size

Population The study involved the dairy farmers in Nyeri county. Kieni was considered appropriate since it had 6 milk marketing cooperative societies, 3 dairies, two public and one private, Nyeri county has several towns that are appropriate for milk hawking to hotels and restaurants. This meant that all distribution channels are available to its residents. According to Central Bureau of Statistics (2009) Kieni has 45,238 rural households and therefore this constituted the population. Sample Design Yamane (1967:886) provides a formula to calculate sample sizes. A 90% confidence level and precision level 10% are assumed. n N e is the sample size, is the population size, and is the level of precision.

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N= e = hence

45,238 10% n= 45,238 1+45,238(0.1)2 = 100

In order to capture as much local variations as possible, the sample in each zone was spread across 10 locations among farms selected randomly. In some cases where the farmer could not be reached or did not wish to participate in the study, another one in the locality was substituted. A Sample of 10 observations per every location was required, giving a total of 100 respondents. This method and sample size has been used in various researches seeking to get farmers views on various marketing issues affecting their produce, (Musemwa 2007 ) researching on Analysis of cattle marketing channels used by small scale farmers in the Eastern Cape Province, South Africa

3.3 Data Collection

Permission was sought from the relevant authorities before the starting of the data collection. In this research data was collected from primary data, using structured questionnaires with both open and close ended questions which were given to be answered by the chosen sample. Since the intended population was not geographically dispersed, the questionnaires were personally administered by the researcher with the aid of an assistant. This made sure that the questionnaires reached the intended sample and had the best possible response. A pilot study was carried out to determine the validity and appropriateness of the questionnaire.

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3.4 Experimental design

Descriptive statistics, including means and standard deviation, were calculated as measures of central tendency for data related to channels of distribution by the farmers. Graphs and tables were used for presentation and a short description was availed thereof. Inferential statistics was used to compare price versus quantity sold

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CHAPTER FOUR: DATA ANALYSIS

The study was conducted among 96 daily farmers in Nyeri County and the data was analyzed using spss. The study found out that the number of cows owned by the farmers was negatively skewed with on average a farmer having five cows as shown below

farmers
18 16 14 12 10 No. of farmers 8 6 4 2 0

2 8

7 8

8 6

9 4

10 11 12 13 3 2 1 1

farmers 5

10 16 17 15

No. of cows

The average production was 6 liters per cow thought the farmers contend that this used to vary much depending with the availability of fodder. The households consumed an average 15% of this. The milk was distributed through different marketing channels as follows. The farmers with lower number of cows preferred to distribute to local residents which included neighbours and shops those with moderate milk production used hawkers ant those with more milk opted for cooperatives as they would absorb all their milk. 62% of the farmers took their milk to one place 32% to two places while 6% took to all the three places. It was observed those with fewer cows preferred sell their milk to locals while those with more cows preferred to take their milk to cooperatives since they had the capacity to take all their milk. Those who preferred to sell to locals were paid daily hawkers paid weekly while cooperatives were paid monthly. The locals were the best paying since they paid an average of 32 shillings per liter, hawkers had an average of 30 shillings per litre while the cooperatives had an average of 27 shillings per litre. 76% of the were members of cooperatives though they only 26

took milk to the cooperative when they had excess capacity. Though the cooperatives provided other services like advice and farm inputs 65% of the farmers did not feel obliged to sell to then unless they had loans with them.

Objective One: Influences daily farmers on their choice of a distribution channel Farmers opted to sell to locals due to high frequency of payment (daily) 88%, high prices 76%, easy collection procedures 62%. Farmers opted to sell to hawkers because of easy collection procedures 76%, high frequency payment (weekly) 62%, bigger capacity than locals 40% Farmers opted to sell to cooperatives due to their ability to take higher quantities of milk 98%, and provision of other benefits e.g credit facilities and farm inputs 76% as illustrated below
160% 140% 120% 100% 80% 60% 40% 20% 0% early payment 62% 88% 76% collection procedure 62% 62% 88% 76% 62% 40% provision of benefits 76% 76% 62% 62% 98% cooperatives hawkers locals

high prices

capacity 98% 40%

cooperatives hawkers locals

Objective 2, challenges facing marketing of their produce? For those who sold to the farmers their major challenges were; Lack of capacity 92%, high risk of default 87%, complains about quality 68%, Non collection in good time leading to wastage 42%, Lack of loyalty ( stop buying from you ) 20%.

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The major challenges involved with hawkers included high default rate 84% , lack of capacity 60%, complains about quality 63%.. Farmers who opted to sell to cooperatives saw mismanagement of cooperatives as their major challenge 62%, Non collection in good time leading to wastage 78%, Complains about quality 43%, Low prices 26% as illustrated below

180% 160% 140% 120% 100% 80% 60% 40% 20% 0%

cooperative hawkers locals 60% 92% 84% 87% capacity risk of default quality 43% 63% 68% 42% 20%

43% 60% 84% 63% 78% 92% 87%

68% 42%
collection procedure 78%

62% 20%
abadonment mis management 62%

26%
low prices 26%

locals

hawkers

cooperative

Objective 3; possible solutions It was observed that the solutions involved selling milk to more established people and institutions 78% who were less likely to default 56% take more capacity 55% even if at lower prices. This entailed those selling to locals to sell to hawkers and institutions schools. Those selling to hawkers, to sell to institutions schools and cooperatives. Those selling to cooperatives felt that the solution would be to process their own milk of which they had no capacity otherwise they result to electing better officials 63%, government intervention 45% as their only solutions. Further farmers were reluctant to come together as this would mean the compete with cooperatives who were better established and whom they had membership.

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CHAPTER FIVE: CONCLUSION AND RECCOMMEDATION

5.1 Conclusion
Although cooperatives did not limit the quantity of milk a farmer should provide farmers considered it not economical when they took low quantities of milk. thus when the quantity of milk reduced they opted to go for hawkers and locals whom they has a personal touch thus cooperatives seem to be a last result not necessarily because they provided low prices but because the other channels had less red tape and there was personal contact involved. While prices were an important consideration it was not as important as thought as it emerged that the major consideration that the farmers had was the ability to absorb excess capacity of milk and were ready to take an option that guaranteed that will take their milk when there is excess supply this can be seen as farmers dont complain low prices offered by cooperatives. Frequency of payment was also considered important as the farmers opted for those who would pay sooner rather than later. Lack of capacity is the greatest challenge facing daily farmers, in times of high milk production farmers milk went to waste. Milk production is a seasonal affair and largely depended on availability of rain if the government cooperatives and farmers would come up with a means of creating demand e.g through school milk feeding programs and storage systems this would ensure that milk produced is not wasted. In summary the efficiency and competitiveness of production and marketing should be improved in order to enhance smallholder dairy production in the study area. The milk marketing would be improved through reduction in cost of transportation, increased quality and safety for the informal sector, increased capacity and value addition for the formal sector, taking advantage of high population in urban and milk deficit rural areas, and the full exploitation of existing and emerging national, regional and international markets. On the other hand, milk production would be enhanced through the improvements in marketing, use of appropriate dairy production and marketing technologies, sustainable natural resource management, and the increased accessibility to dairy production inputs and support services. 29

5.2 Recommendation
Basing on the observations and subsequent analysis, in order to improve the farmers welfare, the cooperatives should apply the following strategies; Develop pricing mechanism by paying premium to farmers that have organized themselves in a formalized farmer group. This can motivate them to form groups which may eventually lead into a cooperative and build relationship. Pay more for better quality in order to stimulate farmers to produce more. Build trust and farmer commitment to strengthen relationship for reliable milk supply year round. Introduce incentive schemes by paying bonus or a type of profit sharing to farmers who performed well to develop a stable production. Introduce low interest loan for the farmers (profit can be used as revolving fund)to increase production The efficiency and competitiveness of production and marketing should be improved in order to enhance smallholder dairy production in the study area. The milk marketing would be improved through reduction in cost of transportation, increased quality and safety for the informal sector, increased capacity and value addition for the formal sector, taking advantage of high population in urban and milk deficit rural areas, and the full exploitation of existing and emerging national, regional and international markets. On the other hand, milk production would be enhanced through the improvements in marketing, use of appropriate dairy production and marketing technologies, sustainable natural resource management, and the increased accessibility to dairy production inputs and support services.

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