Despite the importance of the diary sector in improving livelihoods of people through income generation, it is still faced by numerous challenges such as low milk prices, post-harvest losses, poor transport networks, poor animal breeds and the biggest of all is poor milk marketing facilities and channels. Although, formal milk marketing through cooperatives has been advocated for, the milk marketing sector has remained largely informal. To understand why the informal milk marketing is still popular, the study sought to the profitability of milk marketing channels by dairy farmers and understand the drivers of choice of informal versus formal milk marketing channel. The study was conducted in Mbarara district and 120 households were randomly selected to participate in the study. The results showed that farmers who sell to formal channels (cooperative) were mainly from male headed households, married, attained primary education as highest level of education, and keep large cattle herds. Moreover, they participate in other income generating projects as compared to farmers to the informal milk marketing channels. Probit model analysis results revealed that the significant determinants for choice of marketing channel are milk selling price, total milk volumes sold, age of farmers, payment period, source of market information, gender, participation in other income generating projects and education levels of farmers. The gross margin analysis results revealed that formal channels were the most profitable with an average monthly gross profit of Shs 1,415,088.9/= per farmer for 1000 litres of milk sold compared to Shs 991,206.3/= per households in the informal channels. The probit model indicated that age, milk volumes, engagement in off-farm work and milk prices significantly influenced farmers’ decision to sell milk to the formal channel. This study concludes by recommending provision of loans to enable farmers acquire good diary breeds so as to enable them produce high milk volumes that motivate them to sell to the formal channel as well as establishment of cooperatives at sub county level to ease access to the formal marketing channels by all farmers.

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