Production structure and derived demand for factor inputs in smallholder dairying in Kenya

This study examined the production structure of smallholder dairy farms in Kenya’s marginal zones, using duality theory in production and costs. The restricted translog cost function was used to derive a system of six input share equations, which were estimated simultaneously with the cost equation by the iterative Zellner procedure. The Morishima elasticities of inputs and the price elasticities of factor demands were computed, and economies of scale were determined. The results indicated that the production structure is a fairly well integrated system of activities, despite scale diseconomies. The Morishima elasticities indicated that factor inputs are substitutable. For example, as prices of formal feeds remain relatively high, informal feeds may be substituted for expensive formal feeds. Policy makers can use these findings to suggest ways of rationalizing feed quality and markets. This would enhance extension and research on balancing protein needs with the current use of roughage on the farms.