Kenya's stated policy is to increase dairy production through sustained liberalization of output and input markets. The present study assessed dairy farmers' responsiveness to both market price factors and non-price factors within a liberalized market environment. Econometric analysis used in the study is based on a profit function using farm household survey data collected for a year. Results showed that dairy farmers are more responsive to non-price factors than to price factors. Hence the need for a consistent and a sustained liberalization program in the sub-sector, as well as reinforcing liberalization policies in place by increasing public expenditure on rural infrastructure and other agricultural support services.Journal of International Development J. Int. Dev. (wileyonlinelibrary.com) p 0 ¼ Restricted profit normalised by the price of output (P y ); P 0 i ¼ Price of the jth input (P i ) normalised by the output price (P y );

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The dairy industry in Kenya is an important source of livelihood among the smallholder farmers who supply over 70% of the total milk. However, there is a growing concern on rising costs of milk production among farmers. The study assessed profit efficiency of smallholder dairying in the Rift Valley and Central Provinces of Kenya using stochastic frontier analysis for estimating farm level profit efficiency and identifying the specific determinants of efficiency. The results showed that the farmers are fairly profit efficient with an average of about 68%. Cost of fodder produced on farm significantly improved profit efficiency among farmers. However dairy profit efficiency can be enhanced if fodder production is embraced, as well as other supplemental feed technologies that are commensurate with local conditions. Institutional policy reforms on smallholder dairying will help protect the industry and its sustainability for smallholders.

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