An Economic Analysis of Production and Processing of Raw Milk in the Kingdom of Saudi Arabia

This paper analyzes the structure of production and processing costs of raw milk in the Kingdom and studies the effects of by-products and subsidies on these costs. A cost function was estimated and its economic derivatives were calculated to assist decision makers in this sector. This paper is based on a cross section data from 25 dairy farms in the Kingdom. Empirical results showed that the cost of producing raw milk is SR 0.924/liter, and the most important cost factors are feed costs, depreciation, and labor costs contributing 50%,17%, and 11%, respectively of total production costs. By-products of raw milk production and government subsidies reduced production costs by 19.7% and 18.83%, respectively. Average processing cost of milk is estimated to be SR 1.04liter representing 40.47% of the average cost of packaged milk, whereas the cost of obtaining raw milk represents 59.53%. The most important factors affecting processing costs are packaging materials, depreciation, labor wages, variable administrative costs, and fixed administrative costs representing 34.71 %, 14.29%, 14.29%, 12.66%, and 12.08%, respectively. On the other hand, subsidies had a little effect upon reducing processing costs (by only 1.92%). Econometric estimation of raw milk cost function using different forms showed that the exponential model is superior to the other three forms. The elasticity of the estimated cost function is found to be 0.73. It is concluded that the specialized projects are far from reaching the stage of optimum production levels and that increasing the numbers of cows will lead to benefiting from the economies of scale taking into consideration the existing prices of raw mil