An economic analysis of small scale dairy milk processing in Kogi State, Nigeria

K O Osotimehin, A A Tijani* and E O Olukomogbon*

Department of Management and Accounting, Obafemi Awolowo University, Ile-Ife, Nigeria
*Department of Agricultural Economics, Obafemi Awolowo University, Ile-Ife, Nigeria
kosot2001@yahoo.com

Abstract

The Nigerian dairy industry represents an important component of the agribusiness sector of the economy with great economic, nutritional, and social implications. This study examined the profitability as well as operational efficiency of milk processing enterprise in Kogi state, Nigeria. Data used to achieve this objective were obtained from 100 nomadic households, which were randomly selected using a multi-stage sampling procedure. Data were generated using a questionnaire as well as direct observation (cost-route method). Descriptive statistics, budgetary analysis as well as operational efficiency index were used to analyze the data.

Results showed that milk processing enterprise was profitable and flexible-A net farm income of N18, 011.20 per month was realized by an average processor, while the fixed costs accounted for about 1% of the total costs of processing milk into different products. It was also shown that operational efficiency was not generally high among the processors.

Based on these results, the study advised less efficient processors to adopt the practices of the efficient ones in order to make the enterprise more profitable.

Keywords: Economic analysis, milk processing, operational efficiency, profitability, small scale

Introduction

One of the major food problems in Nigeria is the gross deficiency in protein intake, both in quantity and quality. The low protein intake has been responsible for reduced human productivity with high incidence of infant mortality, severe malnutrition and general weakening of human body which pre-dispose people to diseases, low health status, and shorter lifespan (Mbanasor 2002). For instance, the average consumption of animal protein per day is lower than the minimum 35 grammes recommended (from animal sources) by the Food and Agriculture Organisation (FAO) for daily maintenance of the health of the population (Bincan 1990). The country-specific analysis of FAO data for 1988-1990 also found that Nigeria was among the list of countries whose fat-to-energy ratio (FER) fell below the minimum recommendation of 15% dietary energy supply from animal fat (FAO 1994).

Dairy products provide the most important amino acid required for body building as well as tissues repairs in human beings. Animal protein equally supplies its own level of energy required for daily activities. It is also essential for the synthesis of certain hormones, enzymes and body products in both man and animals. Nigerians have been observed to consume more of plant protein, which has been found to be of lower quality than animal protein. The small scale dairy milk processing industry can take up the challenges of improving the consumption of animal protein by the teeming population as well as supply those nutrients, which are deficient in small scale staples such as cereals, roots, and tubers. However, the dairy industry in Nigeria has not been able to fulfill these aspirations in terms of quality and quantity of its products.

Table 1 shows that there were wide gaps between estimated domestic production and consumption of milk for the period 2000-2005. The deficits were made up through importation of milk and milk products. However, with the current removal of subsidies in European nations, the cost of importing dairy products would definitely constitute a serious stress on the country's foreign exchange.

Nigeria has the potential of being a major milk producer in Africa. It has been suggested that if improved methods of storing, processing, packaging, and transporting are employed, output can be raised substantially for internal use, as well as for export. Nigeria is the largest producer of cow milk in West Africa and the third in Africa (Michael et al 1991)

According to FAO (1988) report, the dairy industry provides a means of livelihood for a significant proportion of rural pastoral families in the sub-humid and semi-arid ecological zones of Nigeria. For instance, about 183,000 rural households were said to have derived some income from the dairy industry in 1986. This ability of the dairy enterprise to generate regular income and to contribute to the household diet on a regular basis throughout the year is an advantage over other agribusiness enterprises (Muriuki 2001). In addition, apart from providing employment to the processors, it also provides it to informal milk traders, cooperatives, and others dealing with milk markets. Estimates from vaccination, cattle tax and sample surveys put the cattle population in Nigeria at about 12 million (Adegbola 1990), while the Federal Office of Statistics (1994) put it at 16 million. About 96 percent of the total cattle population in Nigeria is believed to be in the hands of pastoralists (RIM 1990), who are predominantly Fulanis, the Shuwa Arabs, and the Bororos. Consequently, they are the most important source of domestic milk in Nigeria (Yahuza 2001). These cattlemen practice a pastoralist type of management whereby cattle are held in the vicinity of the village or urban areas during the wet season and then taken to lower pastures during the hot months in search of better grazing (Douffissa 1993).

The inadequacy of milk and milk products in the country in spite of the substantial estimated population of cows raises questions about the economic viability (profitability) of milk processing among the nomads. The main objective of this study therefore was to carry out an economic analysis of the small scale dairy milk processing industry in Nigeria, using Kogi State as a case study. In specific terms, the costs and returns to the smallholder milk processors, and their levels of operational efficiency were estimated.

According to Russell (1985) and Igwe (2002), the milk industry as a whole is divided into two main parts; the production of milk on the farm on the one hand and the processing and distribution of milk and milk products on the other hand.

Most studies conducted on the small scale diary industry in Nigeria have focused on the problems militating against the ability of the industry to meet the demands for milk and milk products by the teeming population. They have concentrated on the means of increasing the quality and quantity of milk and milk products by the dairy industry; none, to our knowledge, have addressed the economic viability or profitability of the small scale diary processing industry in Nigeria in recent time. For instance, Akinola (1995) suggested that, for a successful and efficient dairy milk processing enterprise to be achieved, there must be proper selection of dairy cattle, adequate feeding and regulated milking of the cattle, coupled with an appropriate processing technique.

Adeneye (1991) listed the various factors responsible for the inadequacies in the dairy enterprises as:

(i) Land tenure and crop farmers conflict with the pastoralists.
(ii) Poor genetic quality of natural herd.
(iii) Lack of input supply and credit
(iv) Inadequate feed and water resources
(v) Inadequate disease and health care management
(vi) Inadequate infrastructures
(vii) Absence of good dairy extension services.
(viii) Inadequate understanding of existing small scale milk production systems.
(ix) Lack of trained manpower for production and processing.

Abba (1995) focused on the effect of feeding on milk production, while Igwe (2002), suggested the adoption of the concept of village technology, which is based on the existing techniques, their merits and deficiencies, knowledge, materials, skills and resources available to the nomads, if the Nigerian dairy industry was to meet the high demand for dairy products. Tahir (1998) hinged the inability of the dairy industry to meet the demand of the country for milk and milk products on the neglect of the industry by the government through the lopsided distribution of resources within the agricultural sector. Akinwumi (1978) on the other hand, focused on the economics of milk production in Nigeria.

Materials and methods

This study was carried out in Kogi State, Nigeria. The state lies within Latitude 7⁰N and 8.5⁰N and Longitude 5⁰E and 7.5⁰E of the Greenwich Meridian, and is positioned in the middle belt and the derived savannah zone of Nigeria. Kogi state has a land area of 30,354.74 square kilometres, with a population of 4.1 million people. It comprises three major tribes: the Okuns, Ebiras, and the Igalas, with other various minor discernible tongues. Due to its agro-climatic conditions, varieties of crops such as sorghum, maize, cowpea, cassava, yam, and tree crops like oil-palm coca, coffee, thrive in the state. Its location also supports the growth of a number of grasses and pasture legumes, which allow the widespread rearing of cattle in the area.

Data for the study were obtained through a multi-stage sampling technique. In the first stage, the whole state was stratified into two strata on the basis of the natural demarcation created by River Niger, which splits the state into Kogi West and Kogi East, comprising 11 and 10 local government areas (LGAs) respectively. In the second stage, five LGAs were randomly selected from each of the two strata. In the third stage, two settlements were randomly selected from each LGA. At the final stage, five nomadic families were randomly picked from each settlement. In all, a total of 100 nomadic families were interviewed. Data sought from the respondents, using the cost-route and farm business survey methods, centered on their socioeconomic characteristics, processing and marketing activities, as well as the costs and returns to the enterprise. The respondents were monitored for three months in order to obtain data on these variables.

Data generated were analyzed using descriptive statistics, budgetary analysis and operational efficiency index. Descriptive statistics was used to describe the socioeconomic characteristics of the respondents. The budgetary analysis was used to estimate costs and returns to milk processing enterprise. This involves the determination of the net farm income (NFI), which is the difference between gross revenue and total costs of processing raw milk into different products. This represents the return to the processor for unpaid labour, management and equity capital (net worth). NFI is also that sum of money that can be withdrawn from the business without affecting equity capital. The total costs comprise fixed and variable costs of production; the former do not vary with the level of production while the latter doOperational efficiency index measures the efficiency with which resources are utilized in the production / marketing of a given commodity. The performance of the marketing functions necessarily entails the utilization of some resources and therefore the incurring of costs. The costs incurred in the utilization of resources can easily be traced to those resources. Therefore, many marketing studies worked with resource utilization costs. Such utilized resources can be classified as equipment, labour, management, rent, transport and miscellaneous items. Where only one product is handled and sold, the cost chargeable to each unit of the products is obtained by dividing the total costs by the total weight of the product handled and sold. Hence,

……………. (1)

However, because of the problem of measuring the numerator in the above mathematical definition, unit cost minimization is used as the definition of operational efficiency as denoted by equation 2:

Since Q in equation (2) is constant with no quantity loss, operational efficiency can be given as we have in equation (3):

………… (3)

Since P is assumed to be constant in a free and competitive market, we finally have:

...…….…………... (4)

As earlier indicated, output in the equation does not refer to physical output alone. It includes the price which consumers are ready to pay. Given the prices of the inputs, the denominator refers to the total marketing charges that are incurred on the inputs that are utilized in the marketing of a given unit of the commodity of interest. Whatever the numerator given in a particular market situation, the degree of efficiency of that market is the extent to which the denominator, i.e. the unit costs are made smaller. The efficiency of an industry, which is an element of performance, may be related to the industry's structure and conduct (Olufokunbi 1977)

Results and discussion

Socioeconomic

Table 2 shows the socioeconomic characteristics of the respondents. From the data generated from the field survey, the ages of the nomads interviewed ranged between 25 and 85 years, with the mean age being 46.51 years. This implies that decisions were made by active and productive age bracket. About 64 percent of the respondents were less than 50 years and this should, ceteris paribus, have a positive effect on productivity. As observed by Adesimi (1982), a farmer's age affects his efficiency in performing farm management decisions.

With advancing years, the goals of the farmer tend to change; security tends to be more important to him than long-term profit maximization. Discussions with the respondents showed that although some of these household heads were not directly involved in milk processing, they made major management decisions.

With respect to the literacy status of the respondents, the table reveals that all the sampled nomads had no western education. This contrasted sharply with the work of Ngongoni et al (2006), which found that all respondents in the study area were literate. As reflected in Table 2, only a small proportion of them (5%) received the Koranic education. One of the major factors limiting the productivity of operators in the small scale dairy enterprise was their low literacy level, which might make it difficult for them to fully appreciate the need to adopt improved milk processing and handling techniques (Igwe 2002). Since education is of great importance to agricultural development, the Nigerian government is making frantic efforts to reduce the high illiteracy level prevalent among the nomads. One of such efforts is the establishment of the Nomadic Education Programme to cater for the educational needs of these important pastoralists.

The bulk of the labour input in the small scale dairy processing enterprise is supplied by family labour. The availability of labour is therefore directly related to the family size. As can be observed in Table 2, majority (57 %) had over six members.

The size of herd is traditionally considered a measure of wealth and social status among the nomads; the larger the size of the herd of a nomad, the greater the security such an individual enjoys. As shown in Table 2, 80 percent of the respondents had at most 80 heads of cattle while majority (55%) had between 41 and 80 heads of cattle. This indicates that the industry was dominated by smallholder nomads. When asked about their preference for the sex of cattle in the herds, majority (64%) preferred to have more cows in their herd than bulls; which means that the main goals of an average nomad are the growth and sustenance of income generating ability of the milk processing enterprise. This is supported by reasons adduced for the preference. These are the desire for more dairy cows to boost milk production and to sustain and increase herd size (wealth). Liquidity, that is, the ability of the business to generate sufficient cash to meet financial commitments as they become due without disrupting the ongoing operation of the business, was the reason advanced for the preference of bulls to cows by 28 percent of the nomads.

Costs and returns to the milk processing enterprises

The division of labour in the nomadic Fulani family assigns herdsmen to the business of cattle rearing, while their women and children are saddled with the business of milk collection, processing and marketing. Fresh milk is usually processed into various small scale milk products, including nono (sour milk), mai sanu (local butter), and wara (Yoruba cheese) or cuku (Fulani cheese). These women also produce a non-milk product, fura (cooked millet balls) to complement their milk products. Since these products have a short shelf life, the women and their girls often hawk them around the local area.

The data revealed that the women used a number of inputs in their milk processing enterprises, which include calabash, spoons, plates, pots, fuel wood, coagulant leaf, and fresh cow milk. Items such as calabash, plates, pots, and spoons can be regarded as "capital" inputs or "fixed inputs" since they are used up in a single production process. The geometric means of such fixed inputs were calculated. In order to obtain depreciation expenses on these inputs, an appropriate useful life was assumed for each of the fixed inputs in accordance with the degree of use.

Using straight-line method, appropriate depreciation expenses were calculated for processors in each LGA, and these are presented in Table 3. The three main items of total costs of the enterprise were fresh milk, transportation and fuel wood. The average weight of the milk collected by these processors was estimated to be 5kg. The imputed cost of raw cow milk accounted for about 51.5 percent of the total costs.

As shown in Table 3, the lowest value of N3120 / month was obtained in Kabba / Bunu LGA, while the highest value of N9100 / month was recorded in Ijumu LGA with the average for the study area being N6442 / month. Transportation, which accounted for 30.42% of total costs of milk processing, is next to raw milk in terms of importance. The average cost of transportation was N3796 / month. This item was significant because most of the settlements were not accessible due to the poor nature of their roads, thereby attracting higher fare by the few transporters. The contribution of fixed costs to the total costs was negligible (about 1%); thereby implying that the enterprise is very flexible, that is, it is easy to enter or exit it.

The monthly average revenue on LGA basis is contained in Table 4. The table also shows the cash receipts from the sales of the main products of the enterprise; nono (sour milk), wara (cheese) and mai sanu (butter). Nono, wara and sai manu contributed 51.70%, 27.15% and 20.15% respectively to the total revenue.

The mean monthly gross revenue for the study area was N29, 679. The mean monthly net returns to the enterprise presented in Table 5, show that the enterprise was profitable in all the LGAs and in the entire study area. The mean net returns ranged from N6, 984 (Devina) to N23, 796 (Adavi) with a mean of N18, 011.20 for the study area. These figures represent what could be withdrawal from the business without affecting its net worth. In other words, an average processor earned N18, 011.20 on his unpaid labour, management and equity capital.

To further substantiate the profitability of this enterprise, the ratio of net returns to total expenses (return per Naira invested) ranged from 1.49 (Devina) to 4.37 (Kabba/Bunu) with a mean of 2.54 per N1 expense for the study area (Table 5). That is, every N1 expended returned N2.54 to the processor.

Though the returns to these local milk processors are encouraging, the impact could not be visibly noticed in their mode of operation and lifestyle. For instance, there was no proof of any re-investment of the proceeds into the enterprise by way of infrastructure and the like. Also, operating expense ratio (operating expenses divided by gross revenue expressed as a percentage) of 41.7 indicates that 41.7 per cent of gross revenue was used to cover operating expenses, which accounted for about 90 percent of the total costs. While the net farm income ratio (net farm income divided by gross returns) of 0.73 indicates that 73 per cent of gross revenue went to processor's equity and unpaid labour and management. These ratios are indicative of the profitability of milk processing enterprise in the study area. However, evidences of the calculated high returns from the business could neither be seen in the standard of living of the nomadic families, nor in the acquisition of better technology for milk processing.

Operational efficiency of milk processors

The operational efficiency of the milk processors was determined by using equation (4), which is, the reciprocal of the unit cost of marketing the processed milk. Theoretically, the degree of efficiency in a particular market situation is the extent to which the unit cost of marketing a product is made smaller. Tables 6 and 7 show the distribution of the operational efficiency for Kogi West and Kogi East, respectively.

Table 6.  Summary statistics on operational efficiency in Kogi West Efficiency level Frequency Absolute Relative, % 0 – 10 - - 11 – 20 - - 21 – 30 4 8 31 – 40 14 28 41 – 50 12 24 51 – 60 - - 61 – 70 14 28 71 – 80 - - 81 – 90 - - 91 – 100 6 12 TOTAL 50 100 Minimum Efficiency           = 28.60% Maximum Efficiency           = 100% Mean Efficiency                  = 55.29% Mode                                     = 40% Median                                 = 50% Standard Deviation           = 20.21%

Table 7.  Summary statistics of operational efficiency in Kogi East Efficiency level Frequency Absolute Relative, % 0 – 10 - - 11 – 20 - - 21 – 30 6 12 31 – 40 4 8 41 – 50 12 24 51 – 60 4 8 61 – 70 18 36 71 – 80 4 8 81 – 90 - - 91 – 100 2 4 TOTAL 50 100 Minimum Efficiency           = 22.20% Maximum Efficiency           = 100% Mean Efficiency                  = 56.40% Mode                                     = 66.70% Median                                 = 57.10% Standard Deviation           = 17.70%

Information presented in both tables reveals that operational efficiency among the firms was generally low. For instance, in Kogi West, 60 percent had an operational efficiency of less 60 percent, while 88 percent did not score more than 70 percent. The operational efficiency ranged from 28.60% to 100% with a mean of 55.30%. The mean value indicates that an average processor in the division was not highly efficient.

The picture in Kogi East is essentially similar to that of Kogi West. Table 7 shows that operational efficiency was also low among the processors in the division; with 88 percent not scoring more than 70 percent. Here, operational efficiency ranged between 22.20% and 100% with a mean of 56.4%. The mean value shows that the performance of the processors in the two divisions was not essentially different and not optimal; thus suggesting the likelihood of improving the profitability of milk processing enterprise in the area of study by the reduction of the unit cost of processing milk. This may be achieved if the less efficient ones can adopt the practices of the efficient processors or by the adoption of appropriate improved processing technique by the generality of the processors in the area. The fact that majority of the heads of the nomadic families are relatively young men in their productive age bracket makes this plausible. The particularly high illiteracy level of the processors could however, militate against the realization of such objectives. For instance, they may be highly unwilling to adopt innovation or make changes from their small scale ways of processing milk.

Conclusion

• The study has shown that milk-processing enterprise was profitable and flexible in the area of study.

• An average processor realized net returns of N18, 011.20.

• The level of operational efficiency of the processors was found to be generally low, which is an indication that there still exists opportunities for the improvement in the profitability of the milk processing enterprise.

• Operational efficiency may therefore be improved if the best practices of the efficient ones could be presented to the less efficient for adoption. Alternatively, the processors could adopt an improved processing technique in line with the suggestion of past studies.

• Efforts are therefore needed to gradually change the orientation of these pastoralists such that they will be willing to imbibe improved methods of conducting their businesses.

• The participation of the nomads in the search for a better solution is very important, so as to yield a more sustainable improvement.

• should also ensure continued success of the Nomadic Education Policy in order to harness the potentials of these nomads.

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