Profit efficiency of smallholder dairy production systems: Empirical evidence from Northern Uganda

This study examined the profit efficiency of smallholder dairy farmers operating under different dairy production systems in Gulu District and Gulu City. Specifically, the study assessed the determinants of profit efficiency among farmers practicing zero-grazing, tethering, and herding dairy production systems. A cross-sectional survey design was employed using quantitative primary data collected from 191 smallholder dairy households selected through a multistage sampling technique. The stochastic profit frontier model based on the Cobb-Douglas functional specification was used to estimate profit efficiency and identify factors influencing inefficiency across the dairy production systems. The findings revealed considerable variation in profit efficiency determinants across the three dairy production systems. For the overall dairy production system, equipment costs positively influenced profit efficiency (β = 0.069, p < 0.05), while feed costs negatively affected profitability (β = −0.145, p < 0.01). Under the zero-grazing system, herd size significantly improved profit efficiency (β = 0.700, p < 0.01), whereas feed costs reduced profitability (β = −0.553, p < 0.01). Within the tethering system, land size (β = 0.343, p < 0.05) and feed costs (β = 0.235, p < 0.01) positively influenced profit efficiency. In contrast, under the herding system, land size negatively affected profit efficiency (β = −0.482, p < 0.01), while equipment costs positively influenced profitability (β = 0.313, p < 0.05). The inefficiency model showed that education level, improved breed types, and market proximity significantly reduced inefficiency across the overall dairy production systems. The estimated gamma value (γ = 0.93454, p < 0.001) indicated that about 93.45% of the variation in dairy profit performance was attributed to inefficiency effects. The overall mean profit efficiency score was 0.6121, implying that farmers could improve profit efficiency by 26.14% if they operated at the level of the most efficient farmers. Among the production systems, the zero-grazing system recorded the highest mean profit efficiency score (0.9886), followed by the herding system (0.5163), while the tethering system had the lowest efficiency score (0.3572). The study concludes that improving feed management, strengthening extension services, promoting farmer education, and increasing investment in productive dairy assets are essential for improving profit efficiency among smallholder dairy farmers.