The liquid milk market in Sri Lanka - Analysis of demand and consumer preference : A thesis submitted in partial fulfilment of the requirements for the Degree of Doctor of Philosophy at Lincoln University

Abstract

In Sri Lanka, domestic milk production has increased considerably in the last decade, but fresh milk consumption has been decreasing annually. Before the advent of open economic policies in 1977, 80 per cent of the country's requirements were fulfilled through domestic milk. Now it only accounts for 45 per cent of domestic requirements, with the balance being met through the importation of dairy products. A particular feature of Sri Lanka is that milk powder consumption has increased dramatically and almost 95 per cent of imports are in the form of powders. The current economic crisis in Sri Lanka has increased the prices for imported food products, particularly milk powder, due to the depreciation of Sri Lankan currency value against the U.S. dollar. Milk powder, which was earlier easily accessible and affordable, is now difficult to access and expensive. Liquid milk is seen to have nutritional advantages over powdered milk and there also appear to be opportunities to replace imported milk powder with domestically produced liquid milk in Sri Lanka. Therefore, this study investigates the demand for milk products in Sri Lanka and consumers’ willingness to pay (WTP) for the key attributes of liquid milk. The first objective of this study was to estimate the demand for disaggregated milk products, such as fresh liquid milk, milk powder, and flavoured liquid milk. Multi-stage budgeting approach and a QUAIDS model were used to estimate the price and expenditure elasticities. Empirical evidence from demand estimation revealed that households are price sensitive to all the disaggregated milk products considered in this study. Specifically, households are more sensitive to price changes in fresh liquid milk than milk powder and flavored liquid milk. Moreover, the findings of this study revealed that all the disaggregated milk products considered are substitutes for each other, and a strong substitution relationship exists between milk powder and fresh liquid milk. The second objective of this study used a choice experiment approach to estimate the respondents’ preferences and WTP for liquid milk attributes in Sri Lanka. This study focuses on five attributes of liquid milk—milk fat, processing technology, food safety measures, packaging, and price. A random parameter logit model was used to estimate WTP for the attributes of liquid milk since consumers' preferences are heterogeneous. The findings of this study revealed that respondents on average prefer low-fat milk to whole milk, pasteurization and UHT processing technology to no processing, an increase in food safety measures to no change, and reusable packaging to single-service packaging. They are also willing to pay more for these attributes. The results revealed that preferences for milk attributes are heterogeneous, indicating that consumers with different sociodemographic characteristics prefer different levels of attributes. The findings of this study will enable policymakers, marketers, and milk processing companies to understand the demand for milk products and consumer preferences for liquid milk attributes while providing information to develop products with varying attribute levels to meet consumers’ expectations and enhance competitiveness. Notably, policymakers can utilize elasticity estimates to formulate appropriate policies to improve the domestic dairy industry as well as the overall well-being and nutrition of the Sri Lankan population.