Marketing channel choice: its determinants and evaluation of transaction costs in smallholder dairy farming in Lilongwe milkshed area, Malawi

Abstract

The Malawian dairy sub-sector is still undergoing growth and mainly relies on smallholder farmers for milk supply. Milk is marketed through both the formal and informal channels, and the latter is dominant. Information gap still existed regarding this dominance. The objectives of the study were to examine the socio-economic characteristics of smallholder farmers in the study sample, to examine the determinants of the choice of the milk marketing channels among smallholder farmers and to determine the differences between transaction costs in the formal and informal marketing channels. A two-tailed censored Tobit model was applied to data on 158 smallholder farmers sampled from the three milk bulking groups (MBGs) namely Lumbadzi, Mpalo and Mponera in Lilongwe milkshed area in Malawi in 2008. Results showed that information costs proxied by quality inspection had a positive influence on informal milk marketing while payment delay, a proxy for negotiation costs had a negative influence and the fear of non-sale had a positive influence on informal milk marketing. In addition, milk production (socio-economic factor) had a positive influence on informal marketing. All these variables were significant at 1 percent level. Results on transaction costs showed that information costs (proxied by quality inspection) were higher in the formal channel (p ≤ 0.01). The same result was obtained for negotiation costs which were proxied by the fear of non-sale and the payment delay. Further, the informal channel had higher monitoring costs (proxied by grade uncertainty and access to extension services) among the sampled farmers (p ≤ 0.01). Higher prices were reported in the formal market and it was recommended that policies should be inclined towards the reduction of transaction costs by improving pricing policy and facilitating transformation of informal milk trade towards formalization.