How Responsive to Prices is the Supply of Milk in Malawi?

Dairy is a key investment sector for the Government of Malawi. Advocacy institutionsoperating in the country have successfully lobbied for increasing the duty applied for powdermilk, with the aim of improving the price received by farmers. It should be noted that whilstan increase of the price paid to farmers would rise their revenues (assuming the same amountof milk delivery), it might also bring additional blessings, in the sense that if farmers respondto prices, they may rise their revenues beyond the increase in prices, and furthermore, theywould expand their delivery of milk to processors offsetting the imports of powder milk andreducing their idle capacity in factories. Hence, the purpose of this paper is to measure theresponsiveness of the deliveries of milk at the milk bulking groups to prices paid to farmers(i.e., the elasticity of supply faced by processors). This is done using a unique dataset thatcomprises information by milk bulking group from January 2009 to February 2013. Theresults indicate that the supply of milk is price responsive. The price elasticity in the shortterm is equal to 0.6 and in the long term is 1.44. This indicates that farmers’ revenues notonly benefit from an increase in the price of milk but also from the increase in the quantityproduced. Furthermore, it indicates the possibility that domestic producers could offsetimports of milk powder by processors, although answer to this requires further research.