The Role of Dairy Cooperatives in Kenya’s Dairy Industry

Dairy cooperatives societies are significantly central to sustainable development of dairy sub-sector as they are mainly intended to empower the communities. Dairy farmers in Kenya have relied more heavily upon cooperative societies to market their milk than have farmers of any other value chain.

Dairy production and productivity 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 sustainable development of the dairy sub-sector. 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.

Dairy Cooperatives In Kenya – History

Kenya has a long history of cooperative development that has been characterized by strong growth, thus making a significant contribution to the overall economy. Cooperative societies are recognized by the government to be a major contributor to national development, as cooperatives are found in almost all sectors of the economy.

The first Co-operative Society, Lumbwa Co-operative Society, was formed in 1908 by the European Farmers with the main objective of purchasing fertilizer, chemicals, seeds and other farm inputs and marketing of their produce to take advantage of economies of scale.

The African smallholder farmers fought for formation of their own Cooperative societies and later the dairy cooperative society was formed in 1928 in Nanyuki known as Nanyuki Cooperative Creameries and later an enactment of the Kenya Cooperative Ordinance of 1930 leading to the registration of KCC and KFA in 1931. In 1931 all the cooperative creameries were united under the Kenya Cooperative creameries.

Githunguri Dairy Farmers Co-operative Society

Githunguri Dairy Farmers Co-operative Society in Kiambu County, Kenya is one of the prime cases in this regard. Formed in 1961 through state initiative, its membership grew from 31 to about 9,000 by 1998. The collapse of the Kenya Co-operative Creameries (KCC), the dairy cooperative union that monopolized the marketing of milk for cooperative societies in the early 1990s severely affected Githunguri’s milk collection activities, as it did not have its own milk processing plant.

With difficulties in marketing members’ milk, which was its principal activity, the active membership of the cooperative dropped to just about 600. However, the liberalization of the cooperative movement in 1997 helped to improve the fortunes of Githunguri for at least three reasons

First, liberalization afforded the management committee of Githunguri the freedom and power to hire professional staff to steer the day-to-day management activities.

Second, the management committee used its new power to borrow using collateral from the cooperative’s property in order to get a loan of approximately 70 million Kenya shillings from OIKO Credit of the Netherlands in 2003 to build a dairy processing plant.

Third, Githunguri acquired the freedom to sell its produce to any willing buyer on the market. This was a radical departure from the past, when cooperatives were only allowed to sell milk to the ailing KCC. Located on the outskirts of Nairobi, Githunguri found a ready market for its products in the city.

Dairy Cooperative Societies play an integral role such as milk collection, grading, bulking and cooling of milk and value addition. These societies also enhance access to dairy production support services like breeding, feeds, extension and credit provision among others.

Records held by the Bungoma County Cooperatives department indicated the initiative to establish more cooperatives had taken root with notable progress. Value addition initiatives such as chilling of milk and/or processing into specialized products like UHT milk, cheese, butter and instant milk powder is being done minimally.

For example, Kitinda Dairy Cooperative Society processes only Yoghurt, Mala and Cheese and pasteurizes and sells fresh milk manually.

Naitiri and Kaptama Dairy Cooperative Societies do chilling and storage of fresh milk for onward transmission to processors. About four dairy cooperatives had acquired and installed milk coolers by 2016, namely, Kikai Dairy Society, Kitinda Dairy Cooperative Society, Kaptama Dairy Coop Society and Naitiri Dairy Cooperative Society out of fourteen existing ones (translating to 28.6%). Today, over 30 cooperative societies have been able to install and are operating milk coolers with plans to undertake value addition.

The capacities of these societies to handle large quantities of milk during rainy seasons are inadequate (low processing capacity). This has been occasioned by poor infrastructure and fluctuating volumes of milk delivered to these societies.

Most of these societies have been grappling with liquidity problems and poor financial management among other challenges. Results from interviews of the managers of the dairy cooperatives and the officials from the Ministry of Livestock Fisheries Agriculture and Cooperatives show that most of the dairy societies have gone under as a result of poor financial management. This has culminated in late payment of the farmers resulting in majority of them resorting to selling to informal retail traders who apparently pay promptly

The Role of Dairy Cooperatives in Kenya’s Dairy Industry

The livestock sector in Kenya plays an important role in contributing to rural livelihoods, particularly those of the poor. The sector is estimated to constitute approximately a third of the agricultural GDP and this share is rising. The rapid increase in livestock production in Kenya is attributed to a fast-growing demand for livestock products, resulting especially from an increasing urban population as well as a rising consumer income. Dairy production forms part of the livestock sector and is regarded as an important farming activity, providing supplementary income, employment and nutrition to a number of people, particularly in rural areas.

Cooperatives have the potential to improve productivity in the smallholder sector as well as enhance market participation by farmers. Organizing farmers through dairy cooperatives has many advantages over individual farming and marketing. It improves or facilitates access to market information, reduces costs of marketing, increases producers’ access to technology, extension and related services, thereby enhancing efficiency in production and marketing of milk as well as dairy products.

Dairy Cooperatives have ability and governance structure to help members achieve Sustainable Development Goals (SDGs). Dairy farming involves high market dependency and socio-economic values wherein Dairy Cooperatives facilitate dairy farmers to vertically integrate to countervail power against oligopolistic powers in distribution and retailing.

This is done by organizing dairy supply chains with better strategic logistics between production, processing and distribution in emerging markets. It is also achieved by reducing financial risks and economic uncertainty faced by members in a mature market caused by increasing volatility in milk and feed prices and paying dairy farmers the milk price at levels that far exceed market prices, when markets are volatile or even depressed; all these through democratic governance structure controlled by dairy farmers and managed by employees with appropriate skill sets, which help maximize returns and minimize costs of processing inputs, thereby reducing transaction costs.

The dairy cooperative enterprises are best suited to meet economic dimensions of SDGs such as reducing poverty and exclusion by identifying economic opportunities for their members, empowering the disadvantaged to defend their interests, providing food, nutritional and health security to the poor.

This is done by allowing cooperatives to convert individual risks into collective risks and mediating member access to assets that they utilize to earn a living. Dairy Cooperatives are value-based and principle driven sustainable and participatory organizations. They lay emphasis on democratic practices, social inclusion, gender equality, job security, better working conditions, competitive wages, additional income via profit-sharing and distribution of dividends.

Also emphasized is poverty reduction, food, nutritional and health security; women empowerment and increased decision making and self-help community facilities and services to support achievement of SDGs. Poverty alleviation or reduction was one of the goals of Dairy Cooperatives through mobilizing self-help mechanisms to create opportunities and social protection by facilitating empowerment of unprotected dairy farmers, achieved through joint, equitable and democratic ownership and management of resources and also via enhanced resilience by reducing financial and economic uncertainty based on the principles of mutuality, solidarity and reciprocity.

Improvement in milk production

Dairy Co-operatives have played a vital role in fostering dairy development, particularly by providing a stable market environment and delivering necessary farmer services for smallholder dairy farmers. This has been made possible through the development of informal or traditional  marketing channels which cooperatives have contributed to and markets dominated by smallholder farmers.

Access to necessary inputs and services is a major contributor to increase and sustain milk production. An increase in milk production has a positive influence in income generation which encourages farmers to invest in better dairy technology, such as improved dairy breeds and better feed, resulting in milk production being more profitable. Farmers produce better feeds and improve housing and care for their livestock, which contribute to dairy development and hence an increase in milk production.

In addition, many smallholder farmers in Kenya still practice or use low levels of technology. They are unable to adopt new production technologies that demand higher investment, given their limited financial resources and skills. Although the adoption of improved production technologies has a positive effect on milk production, it does require high investment.

Cooperatives have played a pioneering role in introducing modern technologies to help farmers increase production and maximize their returns. They have facilitated and participated in, the dissemination and adoption of new technologies through education and training provided to farmers. The adoption of modern technologies for milk preservation, transportation and processing, has benefited smallholder farmers through the maximization of their returns from increased milk production and productivity.

Improvement in milk marketing

The marketing of milk presents serious challenges for smallholder dairy farmers because of its unique features that require special co-ordination in markets as compared to other agricultural products.

Because of its perishable nature, milk requires rapid transportation to the market in order to avoid losses arising from spoilages. Farmers lack post-harvest infrastructure such as chilling facilities to keep milk in good condition hence the need for rapid transportation of milk to the market.

This results in high transaction costs which negatively affect farmers’ decision to participate in markets, thus limiting them from accessing markets. In this regard, co-operatives play a central role in minimizing transaction costs in dairy production and marketing because they improve market participation by overcoming barriers to assets, information, necessary services and, most importantly, by overcoming barriers to markets within which smallholders wish to sell their milk.

Co-operatives therefore improve the marketing of milk through the minimization of transaction costs associated with selling milk as a perishable product. Co-operatives provide a reliable market outlet to dairy farmers and they have the advantage in the collective marketing of milk which significantly lowers transaction costs among the smallholder farmers. The provision of a reliable market outlet that is sufficiently rewarding for farmers acts as a stimulator for milk production and cooperative Societies provide more marketing options to farmers. This in turn brings about major improvements in the production and marketing of milk as well as changes in consumption behaviour of smallholder households since they consume a higher percentage of their produce. Co-operatives also enable value addition through the processing of milk into less perishable products which assists farmers in selling directly to final consumers, thereby earning more profit.

Improvement in market access encourages more intensive dairy production in the form of improved dairy breeds and improved feed technologies that enable smallholder farmers to increase their income and employment, which in turn leads to improvement in the welfares of families, including those of women and children.

The importance of cooperative marketing gives farmers strong bargaining power to get high returns from dairy produce. The cooperative provides its members with a platform upon which they can run their dairy business with members’ interests at heart. Further, cooperative societies were found to assist farmers in provision of information about the market, breeds, feeds and credit, which is important for sustainability and increased milk production and productivity. However, some cooperatives offer dairy farmers prices below market value or impose hidden levies at the expense of the farmer. This discourages the farmers from supplying milk to cooperative societies and prefer to sell it directly to consumers especially those offering better prices.

Improving food safety and standards

Increasing food safety concerns over the effects on health and recent global concerns have led to a growing interest among consumers in food safety assurances and traceability of products offered by farmers. As one of their advantages, co-operatives have made it possible for dairy farmers to produce good quality milk and dairy products as independent farmers are often unable to meet food safety and quality control requirements because of poor milk handling techniques and technology used. Smallholders do not usually have chilling or processing facilities because of extreme poverty, low asset base and no access to finance. Co-operatives can thus provide farmers with such facilities. To ensure good quality products and safety, milk from farmers is tested on a daily basis, which forces farmers to use appropriate milk handling techniques for which they are given appropriate training.

In addition, co-operatives have played a role in undertaking more farmer-oriented research which has expanded dairy education and extension services, and enhanced government role in integrated dairy development. They have played an important role in providing a base for farmer service delivery and for generally stable agricultural knowledge systems. In short, co-operatives play a major role as a source of market information for dairy farmers.

Access to market information improves decision making by farmers and enhances market participation. Access to such information improves production practices to prevent, eliminate or reduce food safety hazards on the farm. These practices include particularly husbandry and management practices such as feed production; cattle movement and traceability; health and treatment, milking procedures, maintenance of milking equipment; dairy cattle housing, water management, hygiene level on the farm; as well as transport of raw milk to selling points. Evidence suggests that farmers with limited access to this information are less likely to adopt standards.

Benefits of cooperatives to the smallholder farmers

Benefits of cooperatives are difficult to measure. Some are tangible or direct as in the case of net margins or savings. Others are intangible or indirect such as cooperatives’ effect on market price levels, quality, and service. Most benefits are evaluated in economic terms but some also may be social. Some benefits derived from cooperatives also spill over to non-cooperative members

• Assured market
• Improved incomes
• Assured payment
• Source of incomes
• Help in upgrading breeds
• Training
• Better prices
• Acquired business skills-recommendation
• Improvement in milk handling
• Better access to social support services
• Better access to outside support services
• Access to information
• Able to save and budget

Dairy Cooperative Services

• Milk Marketing
• Milk collection (both national and county have tried to support)
• Artificial insemination
• Calf raising
• Feed supply and cost are impediments
• Training-coordinate and prioritize for their members
• Extension employ or work with government
• Veterinary Services-they have to make arrangement to establish their own vet service
• Value addition areas focus
• Credit services
• Cows insurance

Strengths Weaknesses Opportunities and Threats Analysis (SWOT)

Strengths of Dairy Cooperative Societies

• Expandable membership
• Dairy is a valued source of livelihood
• Dairy cooperatives are registered and operate as limited companies and they can access finance from various sources
• The hierarchy between cooperative members and board members responsible for decision making is narrow promoting full participation of farmers in decision making (everything is done on democratic decisions)
• Meetings are held at regular intervals to discuss issues to do with the cooperative.

Weaknesses of Dairy Cooperative Societies

• The cooperatives have no adequate infrastructure in place to process diverse milk products to reduce market risk of relying on single product.
  ack of structured and clear benefit packages available to sustain the motivation of member farmers
• Farmers have low knowledge on dairy farming that would promote production of high volumes of quality milk if all farmers get dairy cows.
• The cooperatives cannot consistently supply local market with the products to buyers resulting in market losses.
• Existing Milk collection centres are inadequate and not well equipped
• Most farmers do not have high yielding dairy cows resulting in low milk volumes being supplied to the cooperatives.
• Some cooperative members are side selling milk reducing processing capacity of the plant.
• Most dairy farmers are old and this will cause low production in the future since there are very few young farmers to produce milk for the cooperatives.

Opportunities of Dairy Cooperative Societies

• Growing milk demand and expandable market share.
• NGOs and Donors are supporting cooperative members by giving them dairy heifers to increase their dairy breeds and offering them training to improve their skills and knowledge.
• More producers willing to join the cooperative societies.
• Existing financial institutions have the capacity to provide funds for Developing infrastructure like processing equipment, bulk milk coolers, chilling centres and feed manufacturing units.
• Research centres and universities are ready to improve breeding and expand feed technologies
• Governments are ready to improve existing dairy and cooperative policies

Threats of Dairy Cooperative Societies

• Farmers losing interest in dairy farming
• There is stiff competition from cheap milk products from neighboring countries and local products.
• Competitors are selling high quality milk products causing serious market problems for low quality product of the cooperatives.
• Cooperatives have not established good agreements with input/service providers, to buy animal feed and medicine at reduced prices.
• The cooperatives have no formal agreements with banks for facilitating members’ access to credit; Policy arrangement with banks for facilitating accessibility of credits is lacking