Kenyan diary sector tests cost calculation methods

Published on
June 27, 2017

High on-farm production costs and high chain transaction costs are a key bottleneck for Kenya's dairy sector development. However, solid evidence on these costs is missing. Although various cost calculation methods are available, their accuracy and user-friendliness are as yet undetermined. Kenyan experts chose three methods to be tested for their local applicability.

Five methods available

The 26 participants in a workshop organized by the 3R Kenya project (Resilient, Robust, Reliable - from aid to trade) of the public sector, NGO’s, milk producers, processors, researchers and dairy sector associations, discussed five methodologies which that are currently being used to analyse on-farm cost of dairy production, and one approach for estimating costs across the entire dairy supply chain. These are:
1.    Dairynomics: integrates an ICT application and advisory support;
2.    International Farm Comparison Network (IFCN), a typical farm approach;
3.    International Livestock Research Institute (ILRI) approach;
4.    Tegemeo approach;
5.    New Kenya Cooperative Creameries (NKCC) approach that is linked to extension and other services.

The NKCC also presented its approach on estimating costs and margins along the dairy supply chain. In addition,  three other tools that could support in getting more accurate data for use in these farm economic methodologies and in farm decision making were presented, including Dairy Farm Benchmark, iCow and Uniform Agri.

Three methods under investigation after suitability assessment

The methods were ranked on a suitability scale, and the top three methods were selected for future adaptation and application. The main criteria for assessment of the methods were: suitability for application under Kenyan conditions, method matching with knowledge and experiences of the target user group, availability of required data, ease of data collection and accuracy of the approach to generate reliable results. The participants eventually chose three methods to close the cost-price knowledge gap as one way of contributing towards improvement of efficiency and competitiveness of Kenya’s dairy value chain. They decided to further look into Dairynomics, the NKCC approach, and into a combination of the IFCN and Tegemeo approach. The selected methods are currently being studied for their practical use to determine the cost of production in different dairy production systems in Kenya.

From research and education to practice

The study will also identify cost drivers in different dairy production systems and use them in supporting reduction in cost of production at farm level. Additionally, the marketing and transaction costs in the dairy value chain will be determined, aiming at deriving options for improving cost competitiveness along the dairy value chain. This study will generate 3 MSc theses and one practice brief, comparing the various methodologies for calculation of cost of dairy production by December 2017. By December 2018 another practice brief will be written along with a peer reviewed journal article, highlighting options for improving cost competitiveness along the Kenyan dairy chain.