The study was carried out in smallholder dairy farms in three agro-ecological zones in Kenya highlands between December 2004 and March 2005. The survey showed that dairy enterprise was the most important income generating farming activity in 96% of households in Kenya highlands. Revenue in a dairy enterprise accrues from sale of milk and animals, and milk consumed by households and calves. Though some farms had negative gross margins, on average revenues significantly exceeded costs and the dairy enterprise returned a profit. In the lower highlands the costs of production were 19.1 Kenya shillings (KES) /kg and unit profit was 2.3 KES/ kg; in the upper midlands the costs of production were 16.90 KES/ kg and unit profit was 6.3 KES /kg, and in the lower midlands the costs of production were 18.1 KES / kg and unit profit was 3.45 KES /kg. Nevertheless, a one-way analysis of variance showed that there were no significant differences (P > 0.05) between the arithmetic means of the costs of production for the three agro-ecological zones. However, the arithmetic means of unit profit from milk were significant (P < 0.05) between lower highlands and upper midlands.

These estimates are important for policy makers and development planners when making decisions related to costs and benefits of smallholder dairy enterprises. Farmers in upper midlands were making much more profit from milk than those in lower highlands due to higher milk prices offered by itinerant traders. These showed that cooperatives were not competitive in milk pricing and lower highlands farmers should utilize the other available milk marketing channels. Hence, policies to improve the operational and pricing efficiencies of dairy cooperatives would have a self-accelerating effect on productivity.