Economies of scale and economic efficiency among the co-operative coffee factories of Kirinyaga District, Central Kenya

Abstract

The Kenya Government expects the co-operative movement to play an extremely important role in agricultural development. But in spite of this expectation, the co-operative movement in Kenya has been faced by management problems, including corruption and misappropriation of funds, and by inefficiencies arising from the diseconomies of small-scale. This study is mainly concerned with the latter problem, particularly as it affects the co-operative coffee factories of Kirinyaga district. Central Kenya. The study hypothesizes that the members of a co-operative coffee factory are better off by belonging to a large co-operative coffee factory than a smaller one. Hence, the members would be ill advised to disintegrate the co-operative processing system further by setting up individual processing facilities operating at very low throughput levels. Substantial benefits of both external and internal economies of scale accrue to the co-operative coffee factories as a result of increased volume of output of the societies, the KDCU and the factories themselves. Through economic analysis of costs, coffee quality, members' returns and size of factory, the optimum level of operation of a two disc co-operative coffee factory is found to be about 65 tonnes of clean coffee. This is smaller than the 80 tonnes suggested as the optimum capacity by the Ministry of Agriculture. But even then, only one out of the 36 factories studied operated at this lower level in 1969-70. At optimal level of operation, only 28 factories would have been required to process the 1969-70 crop. For all the factories (44) to operate optimally, the district clean coffee average yield would need to be increased from the level of about .4 tonnes (in 1969-70) to .7 tonnes per hectare. By national standards this is still a "low" yield. In order to increase yields, and hence the factory throughput, it is vital to have the co-operation of members. Society employees should be given an incentive to produce the high quality coffee that fetches substantially higher prices. If the higher prices are reflected in higher members' returns it will be an effective incentive for the members to increase their yields. As a result factories will operate closer to the optimum and the benefits of economies of scale will increase members' returns further. New factories, too, will be constructed once the average yield exceeds .70 tonnes of clean coffee per hectare. As a result of intensification of coffee farming and construction of new factories, new employment opportunities in the rural areas will arise and this will help to ease the severe unemployment and underemployment problems facing Kenya at present. Show more