Livestock Research for Rural Development 18 (1) 2006 Guidelines to authors LRRD News

Citation of this paper

Economic performance of case study dairy farm in Southern Ethiopia

K Ergano and A Nurfeta*

Debub University, Awassa College of Agriculture,
Department of Agricultural Resource Economics and Management
P.O.Box 5, Awassa, Ethiopia
kebebeerg@yahoo.com

*Debub University, Awassa College of Agriculture,
Department of Animal and Range Sciences
P.O.Box 5, Awassa, Ethiopia


Abstracts

Focus on agricultural development in Ethiopia has seen a shift towards the smallholder sector, which is home and employment provider to more than 85 percent of the population. However, the viability status of enterprises within this sector remain largely un-probed research area on-the-ground. This article, which is based on case study of dairy farm at Awassa College of Agriculture, presents results of an economic analysis of the real state, constraints and opportunities vis à vis the performance of the Colleges' dairy farm for the past five years.

Through a Gross Margin Analysis at farm level, the study established that the dairy farm is economically quite viable. Gross margins ranging from Birr 3,589 to Birr 77,920 were obtained in the years considered. However, given the higher genetic potential of the dairy animals and unsatisfied demand for milk in the market, the performance is much less than desired. The cost of production of milk per liter ranging from Birr 1.29 to 1.98 as compared to the selling price of Birr 2 showed a very sensitive profit margin. Feed expense, which accounts for about 90 % of the total expenses, is a major expense of the dairy farm. Identified constraints to production include poor infrastructure, bad sanitary condition, lack of organized record system, bureaucratic bottlenecks, low quality feeds and inefficient purchasing system. Established opportunities for improvement include enhancing housing and sanitary conditions, timely harvesting and better storage of home-grown feeds, following a planned purchasing and selling systems, use of a well -organized record systems, as well as aiming at economic and efficient production in order to achieve sustained production and economic performance.

It is recommended that the farm may be liberalized from bulky bureaucratic purchasing procedures of the University.

Key words: Awassa College of Agriculture, Dairy Farm, Economics, Ethiopia


Introduction

Livestock production is an important component in local economies at both the national and farm household level, where cattle constitute the main livestock species kept by farmers. The main source of milk in Ethiopia is the cow, and the cow's milk constitutes 83.4 % of the total annual milk output (FAO 1993). In view of its ability to generate significant amount of daily cash income and its contribution to the improvement of the livelihoods of very poor people, dairy production is becoming increasingly important in many developing countries including Ethiopia. The dairy sub-component has proved to be practically vital, especially in the smallholder sector where milk is an important source of protein to young children and supplementary income to often cash-starved farm households. The dairy cow is biologically efficient animal in converting inedible roughages to milk. As a ruminant she can obtain as much as 70% of her total feed intake from non-human food sources such as forages and non-protein nitrogen (Walshe et al 1991). This places the dairy cow in a strong competitive position as a major supplier of high quality human food now and in the future. Dairy industry makes efficient use of resources and offers opportunity for profit to those concerned with the production, processing, and distribution of milk and dairy products. Further to this, due to the large numbers of current and potential producers, the smallholder dairy production has the greatest potential and thus provides the best basis for increasing national dairy production. It is for these reasons that dairying in the developing countries is considered to be an important instrument of social and economic change, and is identified with rural development (Kurien 1987).

Despite the significance of the dairy enterprise in both the macro and micro economies, past and current field research studies and intervention programs have revealed biases by favoring crops over livestock systems and technical over socio-economic issues. Although there are ample literatures on the socio-economic aspects of the dairy enterprises in other parts of the world (Kumar et al 1994; Patil and Udo 1997; Singh et al 1993.), literature on the economic outlook of dairy enterprises in Ethiopia is very scarce.

The researchers believe that the study of the productive and economics performance of dairying at case study farm level gives a good insight into the overall performance and viability of the dairy enterprise in the country in general. With such a consideration, a study was sought to critically assess the viability and the nature of constraints and opportunities of the Awassa College of Agriculture (ACA) dairy farm, with the overall objective of generating information to facilitate the running of the College's dairy farm as well as for the planning of future projects. The specific objectives were, to evaluate the productive performance of the farm, to assess the economic viability of the farm, and to examine the major constraints and opportunities at the farm.


Research methodology

The overall research methodology was constituted by different but complementary research methods. A questionnaire was designed in the format of an informal survey checklist, to collect data on the production and marketing condition, constraints, opportunities and perceptions on the performance of the College's dairy enterprise. Information on farm-level dairy enterprise costs and revenues that cover the scope of five production years (the 1997/98 to 2000/01) was collected directly from farm records. Specific data collection techniques used included a direct questioning and discussions with farm managers and other employees of the farm.

The actual economic analysis was based on the Gross Margin Analysis, in which the gross margin serves as the unit of analysis in evaluating the economic performance of an enterprise. Gross margin is defined as the difference between the value of an enterprise's gross output and variable costs of the enterprise, which vary with the size of production. In the analysis, the value of the gross output (gross revenue) included the value of sales of milk and dairy stock, as well as the value of milk consumed on the farm and products transferred to other farm enterprises. Obvious enterprise variable costs such as bought-in feed costs were calculated on the basis of financial prices, while non-priced particulars such as the use of farm-produced grain were calculated using economic prices and based on the opportunity cost principle.


Results and discussion

Maximizing production levels and efficiency is a goal cherished by most farmers and absolutely all-technical interventionists in the local production context. The important question here is: have production levels reached their full potential, and, if not, how can this be best achieved? However, from a strict economic point of view and for the discerning farmer, of paramount importance is not production alone but production in relation to costs, that is, enterprise viability. The important question then becomes: is it worthwhile to engage and to invest in a particular enterprise? This later question forms the pinnacle of dairy enterprise viability analysis.

Productive performance

The farm's dairy heard is descendent of Holstein Friesian dairy cows introduced in late 1970's. The blood level of the existing animals ranges between 75-100% Holstein. The remaining 25% or less is accounted by local breed known as Boran. The total herd size was almost stable all the years in consideration (Table 1). The birth rate was high in 1997 and very low in 1998. Mortality rate was high in 1999 and 2000, due to the outbreak of streptotricosis during that period. Cattle credit was high in 1997, low during the years 1998 to 2001. This indicates that there were higher mortality rates and animal sales than birth rates and animals purchased. The highest average milk yield was recorded in 2000 and this was mainly due to larger number of milking cows and relatively better milk yield (9.6 kg/d).

Table 1. Indicators of production performance of ACA dairy farm

Production Parameters

Years

1997

1998

1999

2000

2001

Total herd size/ year, LU*

37

31

32

36

34

Number of Milking cows/year

24

24

20

26

24

Average Birth rate/year, LU

7.75

3.5

6

6

4.75

Average Mortality rate /year, LU

0.75

1

5.25

4.5

2

Average milk yield, kg/ year

70071

64122

59084

74868

62350

Average Milk yield / year/ head, kg

2920

2672

2954

2879

2598

Average milk yield/ day, kg

193

178

162

250

206

Average milk yield/day/head, kg

8.03

7.44

8.13

9.6

8.6

*1 LU= 1 cow, 1 bull, 0.5 replacement heifer, 0.25 calves
Source: ACA dairy farm record (unpublished)

Economic performance and enterprise viability

The highest gross margin and net profit were obtained during 2000 and 2001 due to high milk production, high animal sales and low feed cost (Table 2). However it was very low during 1998 and 1999. The cost of production of milk per liter was low during the years 2000 as compared to selling price of milk per liter and it enabled the farm to earn substantial profit margin. The lowest gross margin and net profit were recorded in 1998 and 1999. This was mainly due to low average milk yield, low animal sales and high feed cost. Per liter cost of milk was almost equal to the selling price of milk during the year 1997 - 1999 resulting in meager profit margin. Feed expense, which accounts for about 90 % of the total expenses, is a major expense of the dairy farm. As the farm gets free services from the campus such as veterinarians, maintenance workers and farm manager, the cost of these factors are not included in the total expense of the farm. Besides, the contribution of the farm in terms of conducting practical activities and research is not calculated in monetary terms in this study. Generally the economic performance of the farm is encouraging.

Table 2. Summary of returns, expenses and net profit of ACA dairy farm (Values in Ethiopian Birr*)

Particulars

Years

1997

1998

1999

2000

2001

Returns

 

 

 

 

 

         Milk sale

140,142

128,244

118,168

149,736

124,700

Sale of Dairy calves, bulls, cull cows

-

-

134

20,901

2,879

Total Returns

140,142

128,244

118,302

170,637

127,579

Expenses

 

 

 

 

 

Variable Expenses

 

 

 

 

 

         Feeds

119,359

115,122

104,363

81,150

86,691

         Medicaments

723

912

1,174

1,104

382

         Casual labor

5,040

5,040

5,040

5,040

6,300

         Maintenance & repair

0

0

0

1,118

2,351

         Consumables

1,876

1,876

1,876

1,190

1,762

         Electric and water

1,653

1,653

1,653

3,072

3,072

         Stationary

52

52

52

43

61

Total Variable Expenses

128,703

 124,655

  114,158

92,717

100,619

Gross Margin, (Total Returns Minus Total Variable Expenses)

11,439

3,589

4,144

77,920

26,960

Fixed Expenses

 

 

 

 

 

         Permanent labor

2,550

2,550

29,20

2,711

3,731

Total Fixed Expenses

2,550

2,550

29,20

2,711

3,731

Total Expenses

131,253

127,205

117,078

96,263

104,350

Net Profit (Total Returns  Total Expenses)

8,889

1,039

1,224

74,374

23,229

Cost of production per liter

1.87

1.98

1.98

1.29

1.67

Selling Price of milk

2

2

2

2

2

Source: ACA dairy farm record (unpublished)
*1US$=8.6736 Ethiopian Birr

The gross margin analysis of enterprise viability was based on certain indicators (Table 3). The Gross Margin (GM) was used as the basic unit of analysis in evaluating enterprise viability. Given the additional need to evaluate production and economic efficiency, viability assessments were also based on the gross margin per unit of production. Under consideration were the gross margin per enterprise costs (GM/EC) and the gross margin per variable costs (GM/VC), each representing the returns per invested Birr.

Table 3: Gross Margin Analysis of ACA dairy farm for the years 1997 to 2001

Viability Indicators

1997

1998

1999

2000

2001

Average Gross Margin, Birr*

11,439

3,589

4,144

77,920

26,960

Gross margin per cow, (GM/cow), Birr

309.2

115.8

129.5

2164.4

792.9

Gross margin per variable costs (GM/VC), Birr

0.089

0.029

0.036

0.840

0.268

Gross margin per enterprise costs (GM/EC), Birr

0.100

0.042

0.050

0.833

0.288

*1US$=8.6736 Ethiopian Birr

The study established that the dairy farm is overall quite viable in most of the years. Given the higher genetic potential of the dairy cows and unsatisfied demand for milk in the town, the level of performance is much less than the expected. Indeed, the gross margins and returns to investment were relatively low for 1998 and 1999. A return of 4 and 5 cents per each invested Birr in 1998 and 1999, turned out to be one of the lowest GM/VC viability indices for the farm. This can be attributed to escalating production costs in the face of relatively static producer prices. Much of this price squeeze emanates from ever increasing feed costs given the fact that feed costs account for about 90 percent of total production costs for each produced liter of milk. The lack of proper farm accounts has also aggravated this poor economic performance. With no records the farm cannot continuously monitor progress and assess past economic performances, which are essential management practices and the basis of future improvements. Poor record keeping then becomes both a production and viability constraint.

To see the efficiency of labor, labor income was also calculated as total revenue minus costs other than labor cost (Table 4). The analysis shows a positive result for all the years, showing a substantial contribution of labor to the profit of the farm.

Table 4: Labor Income over the years (Values in Ethiopian Birr*)

Years

Total Revenue

Costs other than labor cost

Labor income

1997

140142

123663

16479

1998

128244

119615

8629

1999

118302

109118

9184

2000

170637

88512

82125

2001

127579

94319

33260

Labor income = Total revenue Costs other than labor cost
*1US$=8.6736 Ethiopian Birr

 

Conclusions


References

FAO 1993 FAO Yearbook. Food and Agriculture Organization. Volume 47. Rome, Italy

Kumar H, Singh J N, Kadian V S, Singh K P, Saxena K K and Kumar H 1994 Comparative productivity and economics of dairy enterprises under mixed farming systems. Farming Systems 10:36-44.

Kurien V 1987 True dimensions of dairy development. In: Gupta V (editor), Dairy India. Third edition. New Delhi, India. Pp. 21-24.

Patil B R and Udo H M J 1997 The impact of crossbred cows in mixed farming systems in Gujarat, India: Milk production and feeding practices. Asian-Australasian Journal of Animal Sciences 10:253-259.

Singh K P, Singh S N, Kumar H, Kadian V S and Saxena K K 1993 Economic analysis of different farming systems followed on small and marginal land holdings in Haryana. Haryana Journal of Agronomy 9:122-125.

Walshe M J, Grindle J, Nell A and Bachmann M 1991 Dairy Development in sub-Saharan Africa: A study of issues and options. World Bank Technical Paper No. 135, African Development series, Washington D.C.


Received 3 September 2005; Accepted 2 October 2005; Published 18 January 2006

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