The Kenya dairy sub-sector has been undergoing developments since the 1980s, these has been in the areas of adoption of intensive dairy farming especially zero grazing. There have been concerted efforts to commercialize the sub-sector so as to make it more profitable to farmers, especially smallholder farmers. Despite the development, the profitability in the sector has not been consistent among the smallholder farmers; some farmers realize very dismal profits and even losses. The causes of the varying profits have not been empirically established with the influence of institutional arrangements and financial factors contributing to this inconsistency not fully established. The main objective of this study was to establish the critical institutional arrangements and financial factors that constrain the profitability of small-holder dairy farmers in Nakuru County. A sample of 129 smallholder dairy farmers was selected from Rongai, Baruti, Ngata and Mbogoini divisions of the County. Multi-stage sampling procedure was used to select respondents and the data was collected by the use of structured interview schedules administered by enumerators. The work employed the Data Envelopment Analysis to come up with profit efficiency rankings among the farmers, and the Frontier Model was used to establish the factors that constrain profit efficiency. The data was processed using STATA and DEA frontier packages. The mean efficiency according to the results was 86%. The factors that were significant in explaining profitability efficiency according to the frontier results were: feeding systems (-0.38), breed type (-0.11), gender (0.37), debt amount (-0.0002) and debt asset ratio (21.43). Issues of trust were also found to have effect on profitability, and they included trust on local buyer price (0.52), trust on institutional buyer unit of measure (-0.1.77), and trust on middlemen unit of measurement (-0.05). The positive sign signifies that the factor increases profit inefficiency while the negative sign indicates that the factor reduces profit inefficiency. These findings will be useful to the stakeholders of the dairy industry sub sector to formulate policy pertaining to dairy enterprise inputs, marketing issues and financial products and also provide smallholder dairy farmers with a package of critical factors to enhance and stabilize their profitability


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