Smallholder farmers’ guide to dairy farming as a business (Part 1)

What is a business?

A business is an organization that buys or sells products or services for money. It can also be defined as an activity in which a person earns a profit from providing a service or from supplying goods.

A business involves buying and selling something. The buyer wants to meet a need. He therefore pays some money for the goods or services he requires to meet that need. The seller produces products or offers services that are needed by customers. He does this in order to meet the needs of customers and earn profit in the process. Profit is the amount left after subtracting the cost of giving a service or supplying goods from the amount paid for the service or goods by the customer who buys them, i.e. Profit = Income – Expenses

Similarities between farming and other businesses

Farming is similar to other businesses that we are familiar with. In our local market there are businesses like kiosks, furniture shops, tailoring and others. These businesses help us to get what we need. They provide their owners with income and provide employment to those who work there.

Dairy farmers on their part supply consumers with milk and milk products. They invest in land, cows, capital, animal feeds and labour so that they can provide their families and other consumers with milk. They must however earn profits from their activities if they are going to operate as a successful business.

For farming to be carried out as a business the farmer must plan how he is going to sell the milk so that he can get a good price and a reliable market. Like other businesses he will need information about the price, availability of milk products, buyers, competitors, input suppliers and other factors that affect his business. He will also carry out marketing activities such as value addition, transporting milk to the collection point and selling.

Like other businesses farming is affected by seasonal patterns. Business like tailoring and carpentry are also influenced by seasonal patterns such as demand for school uniform and desks at the beginning of the year and demand for new clothes during the Christmas season. Likewise a farmer must plan knowing that there are seasonal variations in availability of feeds and other seasonal patterns such as high supply of milk in the wet season. He may conserve feeds for the dry season to ensure that his cows have enough to eat and produce milk throughout the year. He may also choose to have a contract with those who buy from him so that the amount of milk sold and the price are determined beforehand.

Importance of business

There are many benefits that businesses bring to a community and individuals. Some of them are listed below.

1. A business is a source of employment for the business operator and his employees.
2. A business is a source of income. This helps in meeting the needs of the business operator, his/her family and those who depend on the business.
3. A business helps in meeting the needs of the community through providing goods and services close to where they are.
4. Businesses promote economic development and promote the welfare of the community.
5. By creating employment, providing income generating opportunities and promoting development in rural areas, businesses help in reducing rural-urban migration and the accompanying problems such as mushrooming of slums.

Importance of farming as a business

Subsistence farming involves producing just enough for consumption by the farmer and his family. Farming as a business on the other hand involves carrying out farming with the aim of making profit. It involves planning and choosing farming enterprises that will enable farmers to earn profit. It also involves having the market in mind when making decisions about what and when to produce.

In order to engage in farming as a business the farmer invests so that he can make more money. He may spend money to buy good quality animals, use A.I. services, provide better feeds, engage in good husbandry practices and add value to what is produced because these help him to earn more income.

Record keeping is an important business practice because it helps the businessman to know how the business is performing. Farmers ought to keep records to help them assess if they are making profit from their activities. The records also provide them with useful information for decision making.

Besides farm records, the farmer will need to seek information on the opportunities available and how best to carry out his business so that he can get more profit from his farm. He can get information on how to improve on his farm business from extension officers, field days, radio programmes, agricultural shows, magazines, brochures and booklets.

MY FARM BUSINESS

Now that we have seen that dairy farming is a business like any other there is need to consider how the business is performing and what we can do to improve it.

Example

Sotet farm is on a 3 acre plot and has 2 cows which are in milk and a calf. One of the cows produces an average of 5 litres and the other 3 litres of milk per day. The family consumes 3 litres while the other 5 are sold through New KCC Ltd. Below is a statement showing the income and expenditure of the farm in year.

(PS: Costs below are for calculation purposes only)

The dairy enterprise did not make profit during the year. Instead it made a loss of Kshs.90,045.

With a total expenditure of Kshs.158,940 the farmer would need to sell at least 7,569 litres of milk at 21/- to avoid making losses. This is an average of 21 litres per day throughout the year. The amount at which the business does not make a profit or a loss is referred to as the break even point. The farmer needs to operate above that level in order to make a profit.

Income                                                                                                                                                Expenses

There are actions that the farmer can take to change this so that the dairy enterprise can give him profit.

• In order to increase profit he can
• Increase income without raising costs by the same amount
• Maintain the same level of income while reducing the costs

Increase income and reduce cost at the same time

Increasing income

A dairy farmer can increase income by

• Increasing the amount of milk sold.

This involves increasing milk production and reducing milk losses. To increase milk production he can feed his cows on better feeds and apply good management practices. If the cows are of low genetic potential the farmer may replace them with cows that yield more milk. The farmer can improve the quality of his herd by using artificial insemination (AI) services and select the qualities that are desirable for the offspring. Milk losses can be reduced through hygienic milk handling to prevent contamination and

• Selling where prices are higher.

Farmers can identify alternative markets that can pay higher prices without them incurring transport and other marketing costs that are equal to or in excess of additional income to be earned at the alternative market. Through bulking milk farmers can collect large volumes that give them bargaining power when negotiating for better prices.

• Preparing and selling high value products e.g. mursik, mala, cheese and yoghurt.

This enables farmers to earn more income after converting the milk into other forms that are sold at a higher price. The demand for such products should be assessed and how they will be marketed determined before starting such processes. There are additional costs including licences, culture, flavour, packaging, energy, transport and labour. These costs should not exceed the additional income earned if the business is to make profit

• Selling by-products.

Farmers can sell manure and other farm by-products that other people require and are willing to pay for. Farmers can produce surplus hay which they can sell during the dry season when animal feed is in high demand and fetches high prices.

Reducing cost in order to increase profit

Another approach is to identify the respective costs and consider what can be done to reduce them without reducing the level of milk production. In the previous example the farmer can reduce costs by growing high quality feeds on the farm to reduce the expenditure on dairy meal. He can also conserve feeds to avoid buying hay in the dry season. Farmers who do not have sufficient land to plant fodder could buy hay when there is plenty of feed because the prices are significantly lower and store it for the dry season.

Timely heat detection can be used to reduce the number of repeats in AI service. Similarly improved husbandry practices can lower the incidence of management diseases and thus reduce the cost of veterinary services. Transport costs could be reduced by bulking the milk with other farmers and using economies of scale as a means of reducing the transport cost per litre of milk. Farmers can come together to purchase inputs in bulk at a lower cost per unit in order to reduce the cost incurred.

Planning

The first step in running a successful business is to have a plan. Planning involves identifying one’s goals and the necessary steps to achieve them. The farmer should plan his farm to cater for the enterprises chosen in a way that will optimize the production.

The farmer will identify opportunities available based on market demand for various products and consider the activities he will implement to take advantage of them. The resources required to carry out the activities are then identified. The farmer plans for how the resources will be availed and provide a time-frame for the implementation. A plan is an important management tool because it guides what is to be done to achieve the goals set and helps to monitor progress made.

Below is a sample farm plan

FARM LEVEL DAIRY ENTERPRISE PLAN

BACKGROUND INFORMATION

Name of farmer: Mfugaji Bora                     Gender: M

Date: May 15, 2016

District: Mashariki

Location: Katikati

Farm size: 3 acres

Description of general features of the farm:

Structures

• Farmer’s house: Semi-permanent
• Housing for cattle: None save for enclosure with barbed wire fence
• Fencing: Barbed wire fence surrounding entire farm
• Paddocks: None
• Water harvesting and storage: None

Slope – gentle slope

Soils – loamy clay

Water availability: Water is fetched from a stream 500 metres from the farm spoilage. Losses can also be reduced by using appropriate containers to avoid spillage during transportation.

Current farm sketch

Part 2 to be continued next week

via SDCP