Analysis of the Household Demand for Dairy Products in Sri Lanka: An Almost Ideal Estimation with a Censored Regression

Abstract

Being the leading segment in the livestock sector in Sri Lanka, the dairy sector still is incapable of meeting at least half of the domestic requirement. Moreover, the annual per capita consumption of milk remains lower than the recommended level for an average Sri Lankan. Hence, this study intends to present price and expenditure elasticities, in order to discover the consumption behaviour of five types of dairy products. Further, this aims to determine the impact of demographic factors which influence the dietary choices of those dairy produce. This paper employed the Linear Approximation of the Almost Ideal Demand System (LA/AIDS) to estimate price and expenditure elasticities, by utilizing the Household Income and Expenditure Survey, 2006/07. The infrequency of purchases, a typical problem encountered in LA/AIDS estimation is circumvented by using a probit regression in the first stage, to capture the effect of demographic factors, in consumption choice. Results reveal that Sri Lankans consume these milk produce regardless of the area they live, size of the household, gender of the household head, education level of the head and spouse, prevalence of heart diseases and diabetes, while the incidence of having young children and blood pressure will have a significant impact. All milk products except milk powder are highly responsive to their own prices. Fresh milk, milk powder and infant milk powder are identified as necessities whereas, the rest show luxurious behaviour, with the income. However, demand for dairy products will be more influenced by price-related policies than income oriented policies. Because milk powder is both price and income inelastic, and most are imported, any restriction would massively affect the demand for milk powder. Moreover, while identifying consumers' needs and wants through various research studies, domestic production should be promoted to meet the current demand.