World Milk Day: How Kenyan dairy farmers manage their money

June 1, 2017
by Berber Kramer

Josephine has a farm in the highlands near Eldoret, Kenya. Every morning, she wakes up early, milks the cows and takes the milk to the cooperative meeting point. From there, someone takes it to the cooperative, while Josephine returns to continue with her other chores at the farm and at home. Each month, around the 10th, the cooperative pays her for the previous month’s milk; she sets this money aside to pay for school fees, fertilizer and other lump-sum or irregular expenditures. Money is tight, so she commits herself to delivering milk to the cooperative every day, saving bit by bit.

One morning, she wakes up and her daughter is sick. The fever is so high that she has no choice but to take her to the doctor. Unfortunately, there is not enough money in the house to pay the doctor—last week, she paid the school fees, and she does not want to knock on her parents’ door again, begging for money. So she skips her morning routine at the meeting point with the cooperative. Instead, while her daughter is in the hospital, she takes the milk to the market center and sells it there. The market vendors give her cash—not at a price as high as the cooperative’s, but at least she now has some cash to pay the doctor’s bill.

Like Josephine, many dairy farmers in Kenya sell their milk to cooperatives, which in turn sell to milk processing companies. To reduce transaction costs, most cooperatives defer payments until the next month. But what if the farmer needs the money immediately? How does this common predicament affect farmer deliveries to cooperatives? What should cooperatives do to attract more milk: Would it help to pay farmers more frequently, or to provide other services to help them manage their often-complicated financial lives?

To mark World Milk Day (June 1), here is a look at two recent IFPRI studies that analyze these questions. The first examined how a dairy farmer’s cash on hand influences her decision where to sell milk. It built on data from the Health and Financial Diaries project, collected among members of a dairy cooperative near Eldoret. Dairy farmers were interviewed weekly, over the course of a year, about all their financial transactions, including dairy and non-dairy income, household health problems, and milk production and consumption.

The study found that farmers receive only 50 percent of their dairy income from the cooperative. The other half comes from buyers in the local market: Vendors, shop-owners, traders and neighbors, who generally pay cash immediately. Because these buyers pay less than the cooperative, farmers lose on average 20 percent of their dairy income on these sales. In addition, the share of dairy income from these market buyers varies: Farmers earn relatively more from the market (and less from the cooperative) in weeks when they have less cash on hand—after a period of lower milk production, in weeks with lower non-dairy income, and in weeks with uninsured health shocks.

These findings suggest two things: First, farmers’ day-to-day decisions on whether to sell to the cooperative with a delayed payment are influenced by how much cash they have at hand, relative to how much they need; second, both farmers and cooperatives would potentially be better off if cash needs did not push farmers to sell their milk in the local market. This goal could be accomplished in various ways—for instance, by providing farmers with hassle-free low-cost advance payments, by improving their access to credit and insurance, or by paying them more frequently.

A second study analyzes farmers’ demand for more frequent milk payments. For this study, IFPRI collaborated with another dairy cooperative near Eldoret, which was interested in assessing the demand for weekly (as opposed to its standard monthly) milk payments, and testing whether weekly payments would increase the quantity of milk delivered by its members.

Researchers gave farmers the options of receiving milk payments either weekly (an “early” payment) or monthly (the default “late” payment), or a mixture of the two. They were then paid under their preferred schedule.  As a comparison choice, they also asked farmers how they preferred to allocate a cash gift between an early and a later date.

While farmers were used to managing milk income, the gifts were an unexpected windfall, and they had not yet developed rules or habits on how to use that money. As a result, their preferences for each source of cash differed markedly.

Consistent with the findings from another experiment in Kenya, nearly all farmers rejected the early milk payment option, even when they could earn more that way, and despite the flexible options of receiving early payments in cash or via mobile money. In contrast, most farmers preferred receiving the entire cash gift on the soonest possible payment date.

When asked why they preferred to continue to defer their full milk payment until the next month, most farmers said that the most important reason was that this allowed them to save for lump-sum expenditures. If they were paid weekly, they said they would be tempted to spend the money sooner. In other words, they use the monthly payment scheme as a commitment savings device. But why did they not apply this rule for their cash gifts? Why did these farmers all choose to be paid the cash on the early date? Why was the gap between allocations of cash gifts versus milk payments so large?

To delve further into that question, the study distinguished between farmers who use their milk payments for lump-sum expenditures and farmers who use that income to finance day-to-day expenditures. Interestingly, the researchers found that for the latter group, the gap between cash gift and milk payment allocations was much smaller—consistent with the idea that how farmers spend their milk income influences their preferences for early payments. This explains why most appear quite patient regarding milk payments but can’t wait to get a cash gift.

What does this mean for farmers like Josephine, who use their milk to manage their financial lives? For them, milk provides a source of liquidity when they need it, to pay a doctor’s bill or day-to-day expenditures. When cooperative income is not sufficient, however, direct payments from the local market remain very important to them. And in advance, they prefer not committing to more frequent payments. Alternative financing mechanisms—such as hassle-free advances or insurance coverage—could help farmers manage their financial lives and better use cooperative membership as a commitment savings device.

Berber Kramer is a Research Fellow in IFPRI's Markets, Trade and Institutions Division. This research was undertaken as part of the CGIAR Research Program on Policies, Institutions and Markets.