Dairy Products Marketing Channels Analysis. The Case of Ada’a Berga District, Ethiopia

TABLES OF CONTENTES

DEDICATION

BIOGRAPHICAL SKETCH

ACKNOWLEDGEMENT

ACRONYMS AND ABBREVIATIONS

LIST OF TABLES

LIST OF FIGURES

LEST OF TABLES IN THE APPENDIX

ABSTRACT

1. INTRODUCTION
1.1. Background of the Study
1.2. Statements of the problems
1.3. Objectives of the study
1.4. Research Question
1.5. Significance of the study
1.6. Scope and Limitation of the Study
1.7. Organization of the Thesis

2. REVIEW OF LITERATURE
2.1. Basic Concepts and Definition
2.2. Structure-Conduct-Performance Approach
2.2.1. Market structure
2.2.2. Market conduct
2.2.3. Market Performance
2.3. Overview of the Dairy sector in Ethiopia
2.3.1. Dairy Production Systems in Ethiopia
2.3.2. Dairy products consumption
2.3.3. Smallholder dairy products marketing channels
2.4. Empirical Literature Review
2.4.1. Review of market Structure-Conduct-Performance Studies
2.4.2. Review of market Participation decision and level of participation
2.5. Analytical Framework
2.6. Conceptual Framework

3. RESEARCH METHODOLOGY
3.1. Description of the study Area
3.2. Data Types, Sources and Method of Data Collection
3.3. Sampling Techniques and sample size Determination
3.3.1. Dairy Farmers Sample
3.3.2. Traders Sample
3.4. Methods of Data Analysis
3.4.1. Descriptive Analysis
3.4.2. Econometric model Analysis
3.5. Definition of Variables and hypotheses

4. RESULTS AND DISCUSSIONS
4.1. Characteristics of Sample Producers and Traders
4.1.1. Socio-Economic characteristics of dairy producer households
4.1.2. Numbers milking cows and dairy production
4.1.2. Access to institutional service of dairy producer households
4.1.3. Assessment of dairy producers marketing channel
4.2. Demographic and socioeconomic characteristics of sampled traders
4.3. Dairy Products Marketing Channel Analysis
4.5. Analysis of Dairy Market Structure-Conduct and Performance
4.5.1. Structure of milk and butter market
4.5.2. Conduct of Dairy market
4.5.3. Performance of milk and butter market
4.6. Econometric Model Results
4.6.1. Model diagnosis result
4.6.3. Factor affecting butter market Participation decision and level of Participation

5. SUMMARY, CONCLUSION AND POLICY RECOMMENDATIONS
5.1. Summary and conclusion

6. REFERENENCE

7. APPENDIX

DEDICATION

This thesis is dedicated; to my brother Fekadu Muleta may his gentle and lovely souls rest in peace.

BIOGRAPHICAL SKETCH

First, I would like to offer lots of thanks to the Great God for his help in all aspects during my study and the rest of my life. Primarily, I would like to express my deepest thanks to my major advisor Dr. Lemma Zemedu for his unreserved effort, sociable encouragement, academic stimulation as well as productive and helpful comments on the entire document. I also extend my thanks to Dr. Bosena Tegegne my co-advisor for her constructive comments and suggestion in the formulation of the research proposal and during the write-up of the thesis. They edited the whole document timely and made very productive comments right from the start. They guided me with patience to enable me to accomplish my study. In addition, I would like to express my sincere appreciation and gratitude to African Economic Research Consortium Collaborative Master of Science in Agricultural and Applied Economics for sponsoring me with tuition fee at Haramaya University, exchange shared facility course work at Pretoria University and research fund during my study. The last but not the least, my special thanks and heartfelt gratitude extend to my Father Ordofa Jara and my mother Watole Dagaga, my brother, Mr. Zekarias Ordofa, my wife.Tirunsh Alamerew and Mis.Alemush Bekeko. As well as Mr. Ewonetu Kebede, Mr. Adimasu Lemessa, and Mr. Dirba Idae for their encouragement, initiation, patience, and all round of support.

ACKNOWLEDGEMENT

First, I would like to offer lots of thanks to the Great God for his help in all aspects during my study and the rest of my life. Primarily, I would like to express my deepest thanks to my major advisor Dr. Lemma Zemedu for his unreserved effort, sociable encouragement, academic stimulation as well as productive and helpful comments on the entire document. I also extend my thanks to Dr. Bosena Tegegne my co-advisor for her constructive comments and suggestion in the formulation of the research proposal and during the write-up of the thesis. They edited the whole document timely and made very productive comments right from the start. They guided me with patience to enable me to accomplish my study. In addition, I would like to express my sincere appreciation and gratitude to African Economic Research Consortium Collaborative Master of Science in Agricultural and Applied Economics for sponsoring me with tuition fee at Haramaya University, exchange shared facility course work at Pretoria University and research fund during my study. The last but not the least, my special thanks and heartfelt gratitude extend to my Father Ordofa Jara and my mother Watole Dagaga, and my Familys, Mr. Zekarias Ordofa, Mis.Alemush Bekeko and Mis.Tirunsh Alamerew. As well as Mr. Ewonetu Kebede, Mr. Adimasu Lemessa, and Mr. Dirriba Idahe for their encouragement, initiation, patience, and all round of support.

ACRONYMS AND ABBREVIATIONS

Abbildung in dieser Leseprobe nicht enthalten

LIST OF TABLES

1.Sampled distribution of dairy farm households

2.Sample distribution of traders

3.Variables hypothesized on dairy market participation and level of participation

4.Socio-economic characteristics of dairy producers (continuous variables)

5.Socio-economic characteristics of dairy producers (dummy variables)

6.Producers market channel choices and volume of supply to each outlet

7.Demographic and socioeconomic characteristics sampled trader

8.Milk market channels

9.Butter market channels

10.Price setting and selling strategy of dairy households

11.Milk average marketing costs for different marketing agents (birr/litter)

12.Milk marketing margin for different channels (birr/litter)

13.Butter average marketing costs for different marketing actor (birr/kg)

14.Butter marketing margin for different channels (birr/kilogram)

15.Results of heckman two-step milk market participation and level of participation

16.Results of heckman first stage (butter market participation)

17.Results of heckman second stage (butter level of market participation)

LIST OF FIGURES

1.Conceptual frame work of the study

2.Map of study area

3.Milk marketing channel Map of Ada’a Berga district

4.Butter marketing channel Map of Ada’a Berga district

LEST OF TABLES IN THE APPENDIX

1.Farmer’s extension contact frequency

2.Access credit, the source of credit and purpose of credit sample households

3. Access, kind and source of information

4. Test for collinearity statistics of explanatory variables

5.Collinearity statistics for dummy variables used in the model

6.Heteroskedasticity test for milk and quantity supply

7. Endoginity test

8. Double-hurdle versus tobit model for milk market participation decision and level of participation

9. Double-hurdle versus tobit model butter market participation decision and level of participation

10. Model tests for milk market participation decision and level of participation

11.Model tests for butter market participation decision and level of participation

12. Conversion factors used to compute adult equivalent

Dairy products marketing channel Analysis: The Case of Ada’a Berga District, West Shewa Zone, Oromia National Regional State, Ethiopia

ABSTRACT

The aim of this study was to investigate the dairy products market chain in Ada’a Berga district. Primary data collected from randomly selected 123 smallholder farmers, 48 traders and 30 consumers. A Heckman two stage model was used. The concentration ratio(CR) results showed that top four milk traders controlled 78.8% and 89.54% of the total volume of milk sold in Ada’a Berga and Holeta respectively and 61.29% and 63.46% butter sold in Ada’a Berga and Holeta respectively. The CR of milk and butter markets were strongly oligopolistic. Education, market transparency and capital, political equality, and corruption were barriers to entry milk and butter trade. The conduct analysis results showed that farmers use different market outlets and price setting strategies to sell dairy products. The result of the pricing setting was not competitive as 51.67% dairy price decisions were decided by buyers. In milk marketing, the maximum total gross marketing margin of producers share was 63.15% in channel III (producer, district retailer to consumers). The maximum producer's share in the butter market was in channel V (producer, district retailer to consumers). The results of the Heckman first stage show that breed type, income from dairy, membership of dairy cooperative and milking cows have a positive and statistically significant effect on milk market participation. While, the distance from market, number milking cows, market information and non-dairy income has a positive and statistically significant effect on the farmers’ decision to participate in the butter market. The second stage Heckman model result shows education, number milking cows, credit and membership of dairy cooperative have a positive and statistically significant effect on the level of milk market participation. Also, factors such as number milking cows, access to credit, dairy income and volume of milk produced have a positive and statistically significant effect on the level of butter market participation. Therefore, strengthening institutions that convey reliable and timely market information; support the dairy market, improve collective action of farmers, address the challenges of financial access to smallholder farmers and traders to decrease the oligopolistic nature of the market. Moreover, give attention to market infrastructural training and yield increasing technologies in the study area to improve production and marketing of dairy products.

Keywords: Market Chain, Butter; Milk, Heckman-two-stage, Ada’a Berga; Ethiopia

1. INTRODUCTION

1.1. Background of the Study

The economic development of Ethiopia is directly correlated to the performance of the agriculture sector. Agriculture contributes 36.2% of Gross Domestic product (GDP) and 72.7% of employment (CIA, 2017). Ethiopia is the first country from Africa in livestock resource and home for 60.39 million cattle. Out of total cattle stock about 12.39 million are milking cows (CSA, 2018).Dairy production is undertaken in all parts of Ethiopia under four categories such as small-scale, medium-scale, rural mixed crop-livestock and large-scale production. The rural mixed crop-livestock dairy production system constituted 72% of the total milk production in Ethiopia (FAO, 2017). Dairy production has potential for millions of rural farmers in terms of employment, food and income. The income earned from dairy is used for buying agricultural inputs; hire labour, rent land, food production and resiliency Tegegne et al. (2013).

Livestock products have highly distributed production systems located far from consumer markets. In Ethiopia about 95% of dairy cattle are kept by smallholder farmers and only 5% of raw milk reaches the formal market Shapiro et al. (2017). Dairy products need a more efficient marketing and processing system along their entire market chain and marketing of dairy products is more difficult for farmers who are often unable to establish their own market linkages Koyi and Wakhungu(2018). Due to underprivileged market structure Ethiopia was known for underutilization of milk (less than 19 litres/year), which is under the African average (40 litres/year) (Yonad, 2009 and FAO, 2011). However, the current demand for milk in the country increased to 27 litres per capita (Land O'Lakes, 2010). Therefore, market chain analysis plays an important role in production, including that in identifying linkage to final markets, efficiency of the production and factors which determine the participation of particular groups of producers in final markets and existence of downstream and vertical coordination in channels that improve efficiency of marketing (Ruben et al., 2017).

Market-oriented production systems are to fills the gap between demand and supply for dairy products in urban centre’s Gelila (2017).However, dairy markets are inefficient and characterized by unfair benefit distribution of profit between farmers and other market chain actors, inadequate logistical facilities, price fluctuation and occurrence of post-harvest losses that discouraging the farmers to produce more volume of production, poor participation and supply low amount of dairy products to the market (Belete, 2010).

In terms of potential, the Oromia region has four big main milk-sheds and contributes 50% of the nation's milk production. Ada’a Berga district has high dairy production potential due to suitable topography with immense grazing areas, rich fresh water supply from its many rivers and spatial proximity to urban markets Van Geel et al. (2018) and TAP (2016). However, dairy production is characterized by low productivity and benefits realized from dairy do not match with existing potential. This due to lack of market access, inadequate logistical facilities, poor vertical or horizontal linkage, price fluctuation; poor market information, poor extension service and for several unknown factors. Therefore, this study attempted to empirically analyze the analysis of the dairy products market chain in the Ada‘a Berga district, Ethiopia.

1.2. Statements of the problems

The expanding population living in urban areas and rising levels of income require more sorted out value chain and marketing channels for production, processing and distributing products (IFAD, 2016). However, Ethiopia suffers from weak market linkages on both the input and output side (Muhammed, 2011; Yilma et.al., 2011).Medium and large scale dairy processing firms operate at less than full capacity and the dairy sector contribution to the economy is inadequate may be due farmers are poorly participating in market (Minten et al., 2018). According to AGP-LMD (2013), about 31% of dairy value addition in Ethiopia is limited by lack of market access and 3.4% milk loss is due to poor infrastructure.

Farmers do not have access to all factors that are needed for delivering a product that responds to market demand and they often face strong economic, social and physical disadvantages (Getachew, 2015). Gelila (2017), stated that dairy marketing in Ethiopia characterized by both formal and informal channels, fluctuated demand and unorganized transport. The small scale dairy producers have found themselves in a difficult market position because they lack sufficient volumes of uniform quality of milk and milk products to attract consumers, lack of marketing facility and distance from consumers (Workneh and Ponnusamy, 2015).

The other factor is inefficient market structure, conduct and performance (Demissie et.al. 2015). Market structure, conduct and performance is the relationship between certain characteristics of the market in concentration, barriers to entry, conduct and performance of market with respect to profitability (Al-Muharrami and Matthews, 2009). Market structure refers to a description of a market in terms of the number and the size distribution of the firms and any entry barriers arising from different factors (Ukav, 2017). Market concentration: reflects the number and size distribution of firms in an industry. Entry barriers reflect any social, political and economic factors such as education, market transparency, corruption, political equality, legal policy framework, capital, experience and trade license which prevent from entering into the market.

There are a number of studies specifically examining the dairy products (fluid milk and butter) marketing and value chains of producers with objectives of identified the actors participate in the chain, factor which determine participation and volume supply, factor influencing channel outlet choice, structure conduct and performance, constraints and opportunities in other parts of the world and in some part of Ethiopia(Kassahun and Fekadu,2009; Ketema et.al.,2016, Tegange,et.al., 2013; Abera, 2018; Selamawit, 2013; Ali, 2017; Hargaweyni, 2015;Tadele ,2015; Mamo et.al., 2014, Melesse, 2013; Meryem, 2013; Zegeyshe, 2016 ; Moti et.al., 2017; Bultossa, 2016; Dirrba,2017 Getachew,2015; Embaye, 2010; Belay, 2014; Bedilu, 2011; and Kitaw et al., 2012 and Gelila, 2017 ).These studies related to dairy in Ethiopia are focused on fluid milk and butter has received inadequate attention. Studying both milk and butter simultaneously can help better understand the dairy sector.

The Ada’a Berga district contributes the highest volume of dairy to the Oromia region as well as for the country. Dairy products are not market arranged and farmers are not benefited from production. The price of dairy products is too cheap in rural areas with respect to the producer and too costly to buyers in urban areas with respect to consumers. The dairy products market chain knowledge is vital for smooth production, marketing and character problems associated with market failure. But, there is no study conducted in Ada’a Berga district that examines the market chain of the dairy products market. Therefore, this study was to produce evidence on the market chain of milk and butter in Ada’a Berga, District.

1.3. Objectives of the study

The general objective of the study is to undertake the dairy value chain analysis of Ada’a Berga district.

Specific objectives of the study were to:

1. Identify the key dairy products, marketing channel, actors, their roles
2. Analyze structure conduct performance of the market
3. Identify affecting dairy market participation decision and level of participation of dairy farm households in the study area.

1.4. Research Question

1. Who are dairy marketing channels, actors and what are their roles and linkages?
2. What does structure- conduct- performance of the dairy market in the study area look like?
3. What are the factor affecting dairy market participation decision and level of participation of farm households in the study area?

1.5. Significance of the study

The study will help to understand the dairy products marketing channel and may give detailed information on how the dairy product marketing currently functioning in Ada’a Berga District. It may point out a factor that constrains dairy production and marketing system. The study may also generate information that helps policy makers how to formulate dairy products marketing development programs and guidelines for interventions that would improve the efficiency of the dairy products marketing channels. The findings of the study would help to make appropriate decisions by the farmers, consumers, traders, investors, and others who need the information for their respective purposes. Finally, this study will also serve as a reference for researchers in other parts of the country.

1.6. Scope and Limitation of the Study

This study focused on the two most economically important cow dairy products (milk and cooking butter) market chain within the Ada’a Berga district. However, the study was not covered all dairy derivatives found in the study area and only focused on major dairy derivatives (fluid milk and cooking butter). The study was used one time cross-sectional data in terms of the wider range of area and time horizon. Despite these limitations, the findings of the research provide an important basis for relevant interventions for the study area.

1.7. Organization of the Thesis

The thesis is organized under five chapters. Chapter one is introduction. Chapter two presents a review of theoretical and empirical evidence to the study. Chapter three discusses the research methodology (description of the study area, data types and sources, methods of data collection, sampling techniques and methods of data analysis) of the study. Chapter four presents the result and discussions in details. Chapter five comprises summary of findings of the study, conclusions, and recommendations.

2. REVIEW OF LITERATURE

2.1. Basic Concepts and Definition

Market: Kotler and Armstrong (2003), defined market as the set of the particular and potential buyer of a product. Market is an area within which one or more sellers of a given product or services and their close substitutes exchange with a group of buyers.

Marketing system: It defined as the total product channels, market participants and business activities involved in the physical and economic transfer of goods and services from producers to consumers. It is usually seen as a “system” because it comprises several, usually stable, interrelated structures that, along with production, distribution, and consumption that reinforce the economic process (Mendoza, 1995).

Marketing Channels: In an agricultural context, a marketing channel is a business structure of interdependent and interrelated organizations that reach from the point of the product origin rural producer to the consumer with the purpose of moving products to their final consumption destination (Chun-Mei, 2011). The marketing channel is a trade or distribution network and it is defined by Segetlija (2011), as sets of interdependent organizations involved in the process of making the product or service available for consumption. The channel follows a vertical structure where products flow from producer to the ultimate consumer and in which actors meet at each market. Different marketers exist in channel arrangements to perform marketing functions that contribute to the product flow. Actors acting between producers and final users are known as intermediaries. Marketing channel is defined as the flow of the produce from the producer (farmer) to the consumer, commercialization (market orientation) farmers and consumers located in different states or different locations.

Market chain and Supply chain: Supply chain is a complete sequence of operations which, beginning the raw material or an intermediate item, finishes downstream, after a few stages of transformation or increments in value, at one or a few final items to the buyer (FAO, 2005). Market chain is defined as links that connect all the actors and transactions involved in the movement of agricultural goods from the farm to the final consumer (Lundy et al, 2004).

Marketable and marketed surplus: Marketable surplus is the quantity of produce left out after meeting farmer’s consumption and utilization requirements for kind payments and other obligations like gifts, donation, charity etc. The marketed surplus is quantity actually sold after accounting for losses and retention by farmers if any and adding previous stock left out for sales (Thakur et al., 1997).

Dairy product: Milk and any food made from milk, and Ethiopian context the type of milk and dairy products that need to be considered are whole milk (liquid milk, Ititu, Ergo, butter milk etc.) and other dairy products from fermented processing butter, ghee , Ayib, Metata Ayib (SNV, 2010).

2.2. Structure-Conduct-Performance Approach

Agriculture is confronted with many problems to overcome challenges in a complex world. Researchers used a different approach to study agricultural problems. The S-C-P approach was first used by Bain (1951) to analyze causal correlations between the structure and conduct of a market. In recent years, S-C-P models were used to study agricultural marketing to identify a set of hypotheses about a relation of market structure, conduct and performance in the African agriculture sector (Banson et al., 2016; Kizito, 2011).

2.2.1. Market structure

It refers to the number, size of firms, product differentiation and conditions of entry which leads to changes in production and marketing practices including contracting and pricing strategies for processing firms within the industry. In general, market structure in agriculture studied in a number of firms, firm size, economics of scale, concentration ratio and import penetration, product differentiation, existence of entry barriers and power distribution (Scott, 1995; Hanekom, 2010).

Market structure is analysed by concentration ratio, Barriers to entry market and Gini-coefficient. Market concentration which refers to number and size of distribution of sellers and buyers in the market, firm’s objectives, barriers to entry, economies of scale and assumptions about rival firm’s behaviours are relevant in determining the degree of concentration and behaviours and performance (Schere, 1980).The concentration ratio is expressed in terms of CRx, which stands for the percentage of the market sector controlled by the biggest X firms. The extent of concentration represents the control of an individual firm or group of firms over the buying and selling of the produce. Four firms (CR4) concentration ratio is the most typical concentration ratio for judging the market structure (Kohls and Uhl, 1985). A CR4 of over 50% is generally considered a strong oligopoly; CR4 between 33% and 50% is generally considered a weak oligopoly and a CR4 of less than 33% is not a concentrated market.

Gini–coefficient: It is an alternative concentration measure that has some similarities to the concentration ratio. Gini Coefficient utilizes market shares to determine the extent of market concentration. It uses the Lorenz curve; the firms in an industry are ranked from smallest to largest in terms of their market shares. Then, the cumulative percentage of the firms is related to their market shares (Bosena, 2008). The problem associated with the Gini coefficient is that it favours equality of market shares without any regard for the number of equalized firms and the coefficient is sensitive to market errors (Todaro, 1998). Barriers to entry into the market affects competitiveness of market(Meryem,2013) and analyses of degree of market transparency, level of education and experience in milk trade, licensing of milk traders, seasonality of demand and perishable nature of milk, licensing procedure. Likewise (sultan, 2016) barriers to entry into market increase power of market and analyze barriers to entry by skill (experience), Capital, Product differentiation and market transparency.

2.2.2. Market conduct

Market conduct refers to the patterns of behaviour that traders and other market participants adapt to affect or adjust to the markets to sell or buy. These include price setting behaviour and buying and selling practices (Kizito, 2011; Bosena et al., 2011). There are no agreed upon procedures for analysing elements of market conduct. Rather, previous researchers’ point to some guidelines in the form of questions. These questions provide a systematic way to detect indications of unfair price setting practice and conditions under which such practice is likely to prevail. More specifically, they cover the following topics: the existence of formal and informal marketing groups that perpetuate such practice; formal and informal producer groups that affect bargaining power; the availability of price information and its impact on prevailing price; the distance from the major market and its impact on price; and the feasibility of utilizing alternative market outlets.

2.2.3. Market Performance

Market performance refers to the economic outcomes that result from the market structure and the firm's conduct. To evaluate an industry’s performance, economists consider allocation efficiency, production efficiency, equity and technological advancement. The S-C-P for different commodities studies and attempts to do a comparison between market structures and conduct on the performance of the market using methods of marking cost and market margin. Jema (2008), explanatory variables used to explain variations in the margin of producer over time might be attributable by marketing costs, total volume traded, time trend, seasonality and lagged margin. A commonly used method to measure market performance is the marketing margin or price spread can be a useful descriptive statistics if it is used to show how the consumer’s food price is divided among participants at different levels of the marketing system.

a) Marketing costs: It refers to the cost incurred to perform various marketing activities in the transportation of goods from producer to consumers. Marketing costs include handling cost (packing and unpacking, costs of searching for a partner with whom to exchange, screening potential trading partners to determine their trustworthiness, bargaining with potential trading partners to reach an agreement, transferring product, monitoring agreement and enforcing the exchange agreement (Holloway et al., 2002).
b) Marketing margin: It is the percentage of the final weighted average selling price taken by each stage of the marketing chain. The total marketing margin is the difference between what the consumer pays and what the producer/farmer receives for his product. In other words, it is the difference between retail price and farm price (Mendoza, 1995).

2.3. Overview of the Dairy sector in Ethiopia

2.3.1. Dairy Production Systems in Ethiopia

Dairy production is an indispensable sub sector of agriculture to improve the livelihoods of the smallholder farmers in Ethiopia. The smallholder farmer’s income earned from daily milk production is used to purchase agriculture inputs or hire labor and land, effectively increasing a household’s food production potential and resiliency. Although the daily income earned is marginal, especially from the low milk producing local breed animals, milk sales and livestock ownership contributes to food security (AGP-LMD, 2013). Ethiopia holds a large potential for dairy development due to its large livestock population, the favourable climate for improved, high-yielding animal breeds, emerging market opportunity, improved policy environment for involvement of private sectors, and the relatively disease-free environment for livestock (FAO, 2017).

GTP (2016) reported that Feed supply, veterinary services and AI services is a weak point for the dairy sector. Fodder and silage are scarce, leading to very high prices for hay and fodder. Some farmers in urban and semi-urban areas use concentrated feed to supplement hay or elephant grass. An important challenge for farmers arising from limited access to feed and fodder is the rapid drop in production during the dry period. AI services are key to the Ethiopian dairy sector, but so far only a fraction of the dairy cow population in Ethiopia is made up of crossbreeds or exotic breeds. The government of Ethiopia has several plans to establish a new institute responsible for inseminating over 10 million dairy cows to increase cross breeds and exotic varieties in order to boost production Veterinary services are entirely provided by the government, and a combination of poor services and a limited pool of qualified veterinarians make it difficult to meet farmers’ needs. Drug supply problems (vaccinations) also restrict the capacity of veterinarians to keep a constant stock of drugs and medicines.

The major sources of milk and milk products in Ethiopia cattle, camel and goats and cattle shares 83 per cent of the total milk and 97 % of cow milk comes from indigenous breeds Workneh and Ponnusamy (2015). Most smallholders do not invest significantly in their dairy production. Cash outlays are minimal-there is little investment in improving animal genetics, in supplemental feed, or in vaccinations or medicines. Progressive small-scale farmers in the various milk sheds are now maintaining higher productivity cross-bred, and sell their milk to cooperatives and commercial milk collectors and processors. The dairy products, including milk, butter and cottage cheese ( Ayib), sour milk butter ( Arera) by smallholders. Small-holder producers sell their milk and milk products to urban areas (primarily through the informal market) when transport is available and affordable. Transporting small volumes of milk to urban centres is a significant cost. Producers convert surplus milk to butter or ergo (fermented milk) which are consumed in the household or sold to their neighbours. Butter or local cheese is supplied to urban areas, as they are easier to transport and less likely to spoil than fluid milk (Land O’Lakes, Inc. 2010; MoARD, 2008; LMD, 2013).

The total milk production in Ethiopia has increased gradually over the last 15 years from less than 1 billion to 3 billion liters in 2016. Even though, milk production was positively rising given the fact that the total herd of more than 56 million cattle includes over 12 million dairy cows still, low milk output and productivity ranging between 1 and 2 liters per cow per day The consumption of milk is projected to grow by 127% from about 5 billion litres in 2013 to 11 billion litres in 2028. The size of the future production-consumption gap is relatively high and the domestic milk production is expected to cover more than 71% of the total consumption requirement representing a milk production-consumption gap of 3.2 billion litres (van Geel et al., 2018)).

In order to meet dairy demand, dairy has been distinguished as a main concern sector for the Ethiopian government, which plans to expand milk production at an average annual growth rate of 15.5% during the GTP II period (2015-2020), from 5,304 million liters to 9,418 million liters. The government is actively promoting the private sector to produce milk and making supporting interests in supply-chain infrastructure, training, and improved breeds, increase of public investment in rehabilitating range and pasture lands to improve feeding and dairy focused agricultural commercialization. Agricultural commercialization clusters that support commercialization of smallholder farmers in dairy have been identified in all four major regions (Tigray, Amhara, Oromia, and SNNP), and the government is particularly prioritizing genetic improvement through selecting premium indigenous breeds and introduction of exotic breeds (GTP 2nd, 2016).

As part of the EIAR dairy support project to Ethiopia in 2008, the different production systems in Ethiopia were characterized and analysed. Basically, dairy production was seen to be divided in four different production systems: Pastoralism, small-scale, mixed crop-livestock production systems, Peri-urban and urban dairy farms and large-scale dairy farming. One of the distinctions between the various production systems is the type of breeds, the purpose of holdings, climate, integration with crop and land holding. Of these four systems, only the last two are currently engaged in the formal supply chain, which requires an amount of specialization into dairy activities. Production from pastoralist areas is seasonal and too remote. In the rural areas, local breeds are needed, suitable especially for ploughing. Their milk (with higher fat content) is economically more attractive for processing into traditional products (butter, cheese). As part of the EIAR research in 2008 a number of successful (small and medium scale) specialized dairy producers have been interviewed. The results of that study shows that main reasons for investing in dairy production were the nearness to markets, a constant market throughout the year and technical support, mainly from NGOs. Peri-urban farmers have positively responded to market opportunities for dairy products in the growing urban centers. In a study done by ILRI in 2000, seven farming systems were distinguished with peri-urban, intra-urban and large dairy farms participating in the formal dairy chain. Other small scale farms were seen to participate in the formal chain indirectly through delivering milk at collection points of the then state farm Dairy Development Enterprise. In rural areas, dairy processing is generally based on ergo (fermented).

Pastoralism: Pastoralist milk production system is a system mainly operating in the rangelands where the peoples involved follow animal-based lifestyles that requires them to move from place to place seasonally based on feed and water availability. Even though information on both absolute numbers and distribution vary, it is estimated that about 30% of the livestock populations are found in the pastoral areas (Belete, 2006). The pastoralist livestock production system, which supports an estimated 10% of the human population, covers 50- 60% of the total area mostly lying at altitudes ranging from below 1500 m above sea level. Pastoralism is the major system of milk production in the lowland areas. However, because of the rainfall pattern and related shortage of feed availability, milk production is low and highly seasonal and range condition dependent (Ketema and Tsehay, 2004). Pastoralists typically rely on milk for food and use animals to save wealth and are not market oriented and most of the milk produced in this system is retained for home consumption. The level of milk surplus is determined by the demand for milk by the household and its neighbors, the potential to produce milk in terms of herd size, production season, and access to a nearby market (SNV, 2012).

Small-scale, mixed crop-livestock production systems : The Highland areas of Ethiopia raise 65-75% of livestock and contribute about 72% of the total milk production in Ethiopia. The highland smallholder milk production is found in the central part of Ethiopia where milking is nearly part of subsistence, smallholder mixed crop and livestock farming. The smallholders’ milk production system is dominated by subsistence farming (FAO, 2017). In this system, all feed requirements are derived from native pasture and a balance comes from crop residues and stubble grazing. Cattle are the main source of milk even though they are kept primarily as a draught power source with very little or no consideration given to improving their milk production capabilities. The surplus is mainly processed using traditional technologies and the processed milk products such as butter, ghee, cottage cheese and sour milk are usually marketed through the informal market channel after the households satisfy their needs (Gebremedhin, 2018).

Peri-urban and urban dairy farms: The most specialized and high-tech system is the intensive milk production system. It is practiced by the state sector and very few individuals on a commercial basis. These are concentrated in and around Addis Ababa. Urban, peri-urban and intensive systems account for 2% of the total milk production of the country (Belete, 2006). Urban and peri-urban milk farming systems are concentrated in and around major cities, and towns characterized by a high demand for milk. This system has been developed in response to the fast growing demand for milk and milk products around urban canters (Gelila, 2017).

Large scale dairy farming: These systems in general are located in cities and/or towns and focus on production and sale of fluid milk, with little or no land resources, using the available human and capital resources mostly for specialized dairy production under stall feeding conditions. As compared to other systems they have relatively better access to inputs (e.g. feeds) and services (e.g. artificial insemination) provided by the public and private sectors, and use intensive management(Tegegne et.al., 2013).

2.3.2. Dairy products consumption

Milk consumption in rural areas can be considered as a function of wealth or availability to a given household, while in urban areas it can be determined by the purchasing power of the household, the level of awareness on its nutritive value and availability. Milk is consumed in its natural state and/or in the form of fermented (sour) milk and milk products. The milk produced on farms is used for calves, consumed by the family or sold in the local markets. In most households in the central highlands of Ethiopia where there are only local cows, the milk is just enough for the calves and there is very little left for family consumption and sale. Although milk and milk products form part of the diet of many Ethiopians, liquid milk as such, is really not part of their diet. Most people use the bulk of their milk in tea/coffee and for feeding infants or the elderly and/or infirm. They however, regularly consume other dairy products such as butter, Ayib and Ergo (Yilma et al., 2011, FAO, 2017). The habit of consuming milk and milk products is yet to be developed, even among middle income urban households with a better purchasing power. The small quantity of milk produced coupled with high transaction cost results in lower prices for smallholder unorganized producers and high product price for poor urban consumers leading to low effective demand. The demand for milk and products appears to be rising, though, in recent years (FAO, 2010).

The demand for milk and milk products is a function of several factors that include population growth, seasonality of demand and supply, low per capita consumption and high transaction costs. The estimated growth rate of the human population of three percent is not much with that of milk production estimated at 2.1 percent. The Ethiopian estimated demand for milk and milk products reach approximately 27 litres per capita by 2020 (O’ Lakes, 2010).

2.3.3. Smallholder dairy products marketing channels

Most dairy farmers in Ethiopia are widely dispersed in rural areas while the majority of dairy markets are in urban areas. Due to the highly perishable nature of dairy products and its potential to transmit zoonotic disease and other pathogens and toxins, it is difficult for dairy farmers to exchange in urban markets. Thus a whole chain approach is basically needed, which includes education of consumers (Berhanu, 2012).

Marketing milk stimulates production, raises dairy farmers ‘income, living standards and creates employment in rural areas. Provision of improved and sustainable milk marketing is important for the advancement of the dairy sector. Different types of smallholder farmers are differently integrated with outside markets, whether national or international. Before choosing a marketing channel, smallholder farmers consider the costs associated with transportation, profits, level of trust among the available brokers and familiarity of the markets, among other factors (Makhura, 2001). Unfortunately some marketing choices pose problems for farmers, and can result in lower farmer earnings. Most produce from smallholder dairy farmers are sold locally, with only a small amount in the terminal/consumer market. Marketing of dairy products is probably one of the most complex due dairy products are perishable, large numbers of intermediates and highly require organized marketing channels.

In Ethiopia, milk and milk products are marketed through both informal and formal marketing systems. The formal system consists of integrated commercial organizations for collecting, processing, packaging and distributing milk and other dairy products. In the formal marketing system there are cooperatives and private milk collecting and processing plants that receive milk from producers and channel to consumers, caterers, supermarkets and retailers; this system does exist in urban and Peri-urban dairy systems. The informal market, the dominant, producers sell to unlicensed traders or dealers, milk may pass from producers to consumers through two or more market agents or simple traditional processing of, for example, butter, ghee, sour milk and cottage cheese and direct sales of unprocessed and unpackaged fresh milk and Price is usually set through negotiation between the producer (seller) and the buyer; this system is predominant in the rural dairy production system (SN, 2010).

Informal markets involve direct delivery of fresh milk by producers to consumers in the immediate neighbourhood and sale to itinerant traders or individuals in nearby towns. The study on the status of the perurban dairying showed that about 70, 69, 60, 52 and 43 % of the respondents sell fresh milk in Ambo, Jimma, Naqamte, Gimbi and Dambi Dollo towns respectively. Relatively, small proportions of milk sales were reported from Baddalle and Mattu (Ulfina G et al. 2013). In Ethiopia, dairy products (fresh milk, butter, buttermilk and cottage types of cheese) are distributed through the informal and formal marketing systems. The informal market involves direct delivery of dairy products by producers to consumers in the immediate neighbourhood and sales to itinerant traders or individuals in nearby towns (Woldemical, 2008).

Meryem (2013), reported that the milk and milk products marketing channels start from producers and link different intermediaries up to final consumers. The market channel for milk and milk products are complex up to the terminal market and identified six milk marketing channels marketing and actors along the chain were producers, semi-wholesalers, dairy cooperative union, processors, retailers and consumers. The total amount of marketed volume of milk which would flow to the market through these channels by different actors was estimated to be 8,428,730 litres of milk per year in the study channel II (producers-semi-wholesalers-processors - retailers- consumers) was the most important by carrying the highest volume 20.3% .The channels each having less transaction was producer to consumer which was only10.4%.

Traditional Ethiopian butter is always made from soured milk; cream is not used. The sour milk is placed in a clay churn or a bottle gourd (calabash). Churns are usually spherical and may have different diameters of a neck and a vent depending on volume of milk to be processed. According to Dirriba (2013), Addis Ababa retailers are owned kiosks or small shops that sell butter to end users; often these retailers purchase butter from wholesalers and semi-wholesaler at the District and Addis Ababa market. Most of them were retailers at Addis Ababa and few of them sold to hotels and restaurants in bulk volume and urban individual consumers, bar and restaurant, cafe and other consumers purchased Sheno butter at shola and marketo butter station/kiosk at Addis Ababa market. The same author revealed that, during survey time, there was no processor respondent that purchases sheno butter at both district and Addis Ababa market for further processing and f rom the consumers’ point of view, the shorter the marketing chain, the more likely is the retail price going to be affordable.

Study conducted by Gizachew (2005), on dairy marketing patterns and efficiency in Ada’ha Liben district in Oromia region identified that itinerant traders purchase fresh butter and cheese from producers in the district and neighbouring regions for resale in urban and rural markets. They buy butter of better shelf life from producers at farm gate or at market place. About 5.5% of butter reaches the final consumer through itinerant butter traders. Price is used as a sign of quality. At the wholesale market in Addis Ababa butter is standardized on the basis of quality. Implicitly expensive butter is assumed to be of better quality, while cheaper ones are inferior. Sometimes quality is compromised and trade-offs are commonly observed between quality and price, and for obvious reasons good quality butter fetches higher price. Getachw (2015), reported that six types of market-outlets to sell milk were identified and the starting point in the milk market channels is the producers and the final users of the products are the consumers. Generally, milk is channelled either to dairy cooperatives, hotels/restaurants and café and then to consumers.

Woldemical (2008) found that the number of intermediaries in dairy marketing channels will have a bearing effect on both producer and consumer milk prices. The shorter the channel the more likely that the consumer prices will be low and the producer will get a higher return. The survey result reported that six milk marketing channels identified and milk was found to be supplied to Hawassa from Yirgalem and Shashamane (Arsi- Negele), as the area was deficient in milk supply. However, only locally produced milk was found to be marketed in Shashamane and Yirgalem as the areas have surplus production. On average, 75 % of the total sampled dairy household had one milk sale outlet. Although dairy producers have multiple outlets for their milk, selling at farm gate was found to be the most important milk marketing channel for Hawassa sampled dairy producers and accounts for about 69% of the total sale volume of milk per day, whereas delivery to buyer in the immediate neighbourhood is predominate and accounts for 69 % of total sale volume of milk per day in Yirgalem followed by Shashemane.

2.4. Empirical Literature Review

2.4.1. Review of market Structure-Conduct-Performance Studies

Many studies have sought to explain the structure, conduct and performance of agricultural markets both in developed and developing countries. The study conducted by Woldemichale (2008) on dairy marketing chains analysis: the case of Shashemane, Hawassa and Dale district’s milk shed, Southern Ethiopia using marketing cost and margin analysis for milk traders found that the average total milk marketing margin (TGMM) in Hawassa, Shashamane and Yirgalem was found to be 37.2%, 40.9% and 52.3%, respectively. The highest (52.3%) and the lowest (37.2%) total gross marketing margin (TGMM) were respectively found in Yirgalem channel and in Hawassa channel. The cooperative society in Hawassa and Shashamane had a gross marketing margin of 25% and 2.5% of the milk retail price, respectively. This large difference between the two cooperatives’ gross marketing margins (GMM) was due to the large difference in purchasing and selling prices between the two cooperatives. Net marketing margin (NMM) of the milk market for cooperative societies was calculated to be 5% and 0.5% in Hawassa and Shashamane, respectively.

Asnakech (2016) investigated the structure conduct and performance of the milk market in Sululta district, concentration ratio, and gross margin was used for analysis. The result of the concentration ratio of the milk market showed a highly oligopolistic nature with a concentration ratio of 87.16% which was dominated by four traders including a dairy cooperative union and three processing plants. The maximum total gross marketing margin in the channels was about 54.55% and the highest producers’ share of consumers’ price was along producers to consumers’ market channel.

Meryem (2013), using the S-C-P model identified the markets for milk in Suluta, district, oromia Ethiopia. The result showed that the top four milk traders controlled 64.2% of the total volume of milk purchased. This revealed the existence of a strong oligopolistic market structure of milk in the study area. Diriba (2013), using the S-C-P model, identified the markets for sheno butter in Kimbit, District, North shewa, Oromia, Ethiopia. The result showed that of the top four milk trader’s concentration ratio (CR), Sheno butter market was competitive in the Aso, Sheno and Addis Ababa market with CR of 18.44%, 22% and 32.41%, respectively. Solomon (2017), employed structure, conduct and performance in beef cattle market, in Dugda woreda of East shoa zone. The concentration ratios for the four large enterprises (CR4) for the beef cattle market in the study area were 93% which indicated that the beef market in the study area was inefficient and non-competitive.

Gizachew (2005) conducted a study on dairy marketing patterns and efficiency in Ada’liben district of Oromia region using concentration ratio identified that milk market to be weakly oligopolistic 41.2%, where the four firms dominate the milk market. The Ada’a dairy cooperative got 28.3% of market share and the three processing industries combined have a market share of 12.9%. The same study reported that the product method of marketing margin analysis is used for different actors. The dairy processing industries got the highest net marketing margin (19.9% of retail price) while the least marketing margin (1.05% of the retail price) was obtained by the dairy cooperative.

Solomon (2004) using marketing cost and margin analysed performance of cattle marketing

System in Borena and found that butchers at Addis Ababa ( Kera ) market received relatively a larger share from total gross marketing margin (69.5%, 63.4% and 61.6%) for cattle supplied from Yabelo, Negelle and Dublin markets, respectively. Regarding producers’ portion, he found that the highest percentage was found for cattle supplied from Dublin market (21.9%), followed by Negelle and Yabelo with gross margins of 20.6% and 18.6%, respectively.

2.4.2. Review of market Participation decision and level of participation

In the agrarian economy, empirical evidence of smallholder farmers’ participation in the market has been extensively considered for a variety of agricultural products. Market participation involves farmers being able to buy inputs in the input market or being able to sell their output in the output market. Level of market participation is defined as the quantity of output sold by a farmer from total production or quantity of input a farmer is able to purchase in the input market (Sebatta et al., 2014). This study considers market participation from the view of farmers being able to sell their output in the output (dairy) market and level of participation from the view of the quantity of output (dairy) sold by farmers in the dairy market. Therefore empirical is reviewed from these perspectives.

Market participation of smallholder farmers affected by the number of household members under the age of five and income from non-dairy sources negatively. Bedilu (2011) using Heckman two stages selection model to identify factors affecting camel and cow milk market participation and level of supply. Whereas, numbers of milking cows, access to information, family size and income from non-dairy sources significantly and positively affected household milk market participation. The second stage of Heckman model output indicated numbers of milking cows, access to market information, the market price of cow milk and income from non-dairy positively affect the volume of milk supply to the market. Access to livestock extension service affects volume milk supplied to the market negatively associated.

Age of household head, dairy farming experience, milk yield per day, milking cow ownership and landholdings size affected milk market participation. Berhanu et al. (2013) used Heckman two-stage selection econometric models that pointed out that milk yield per day, dairy farming experiences and family size of a household significantly affected volume of milk supply. Whereas, the age of the milking cows positively and significantly affected the probability of milk market participation decision. Dairy farming experiences of a household negatively and significantly affected milk market participation and volume of supply. Milk yield per day had positive and significant milk market participation and volume of supply.

Meryem (2013) used Heckman two stage procedures to analyze a cow milk chain in the sululta district from primary sample size 120 dairy producer households. The first step Heckman model resulted that of local and cross breed milking cow owned, sex of the household head, non-dairy income, access to credit and access to market information significantly affected producers’ milk market participation positively and children under 5 years of age and distance from market centre negatively affects cow milk market participation. Heckman's second stage result indicated that volume of milk marketed significantly affected positively by a number of milking cows, age, non-dairy income and extension contact and children less than five years negatively.

Benyam et al. (2017), conducted a study to investigate analysing factors affecting dairy farmers’ participation in value addition in major milk producing towns of southwest Ethiopia using Heckman two stage selection models sample size 238 dairy producing households. The first step of the Heckman two stages results showed that dairy household milk market entry decision was strongly and significantly affected by family size, number of the cross breed and local breed milking cows owned access to credit positively. Whereas, the distance from the milk market centre is negative. The second stage estimation result revealed that level value addition was found to be strongly and significantly affected by the number of a cross breed and local breed milking cows owned, family size, and non-dairy income source of sampled dairy households positively and distance nearest market centre negatively affect level value addition.

Betela (2017 ), used Heckman two stage selection models identifying determinants of the farmers’ participation decision and extent of participation on milk value addition from primary 133 dairy producers’ households. The result of the probit (Heckman first stage) model indicated that farmers’ participation decision on milk value addition was significantly and positively affected by gender, quantity of milk yield produced per day, access to extension service, and access to credit. The households family size and types of dairy cows’ breed had negatively affected the probability of participation in value addition. The second stage Heckman estimation farmers’ participation decision on volume of milk value addition was significantly and positively affected by gender, education level of household, farmers’ cooperative, types of breed owned by household, access to extension service, access to credit, quantity of milk produced per day and consumers’ quality preference on value added dairy products. While family size and distance nearest to market significantly affects farmer decisions on volume of milk value addition.

Dirriba (2017) used Heckman two stage procedures to determine the determinants of Sheno butter market participation decision and level of participation in Kimbibit district from primary sample size 126 dairy producer households. The result of the Heckman first stage (probit) showed that butter market entry decision was significantly and positively affected by age, education level, and distance to nearest butter market and access to market information of households. The second stage estimation result revealed that total butter output, number of crossed bred milking cows, edible oil and vegetables butter consumption and market information were found to significantly and positively affect the volume of marketed butter.While total butter consumption was negatively affected quantity butter supplied to the market.

Abera (2018), used probit regression to analyze the determinants of smallholder actors participation in milk processing and value added dairy chains and results of the study shows that distance to the nearest main road and operational cost significantly and negatively affects the participation decision of smallholder farmers in dairy value chain upgrading and quality milk supply to market, reliability of milk supply, level of education, total income generated, access to market information, experience, significantly and positively influences the participation decision of smallholder farmers in dairy value chain upgrading.

Ali (2017), employed Heckman two stage estimation model to analyze factors determining participation of milk market supply and the results of first stage/probit regression model showed that both decision of participation and level of participation of households in milk market supply were affected significantly by age of the household, educational level, number of milking cows owned, distance from market/urban centres and technical training. Decision of participation of households in milk market supply was also affected significantly by access to credit whereas level of participation was affected significantly by sex of the household, family size and access to market information.

2.5. Analytical Framework

Different scholars use different analytical models to pinpoint factors affecting market participation decision and level participation. Tobit, Double-hurdle, and Heckman two-stage are the most commonly used analytical model by scholars to analyse market participation smallholder farmer problems. The Tobit model is a statistical model proposed by James Tobin (1958) to describe the relationship between a non-negative dependent variable and independent variable. The Tobit model was used to analyse market participation behaviour by Holloway et al. (2004). The Tobit model is based on the assumption that the participation and sales volume decisions are made simultaneously and factors that affect the participation choice and sales volume decision are the same.

A major limitation with the Tobit model assumes that chance of market participation and level of participation are determined by the same variables and with the same signs (Sebatta et al., 2014).

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