The role of the dairy sector in Kenya with respect to the creation of employment, food & nutrition security cannot be overlooked. Smallholder farmers rely on it as their source of livelihood. The sector is however faced with a number of challenges. For instance, low milk processing capacity which can potentially increase the shelf life and retail price of milk, thus having a significant effect on the milk income realized by smallholder farmers. It is based on this scenario that providing a reliable ready market for dairy farmers in Makueni County was deemed important, thus necessitating the establishment of the Kikima dairy plant in the year 1971. The dairy plant has been operational for the last 51 years. However, its effect on the profitability of the dairy enterprise of the target population is not well known. This study, therefore, assessed the effect of participation in milk processing on milk income realized by smallholder farmers. The study utilized crosssection data obtained from a sample of 200 smallholder dairy farmers from Makueni County. Both descriptive and empirical analyses were utilized. Gross margin analysis, probit model, and endogenous switching regression models were applied. Descriptive statistics showed existence of significant differences in individual socio-economic characteristics between milk processing participants and non-participants. Factors identified to significantly influence participation in milk processing include; age, experience, sex, education and farming as the primary occupation. The effect estimates showed a negative and significant effect of participating in milk processing on milk income. Based on the low profitability of the dairy enterprise among the participants despite having higher milk productivity per cow as compared to non-participants, this study recommends that the plant management should consider offering a quality-based payment to the project participants in order to boost their income levels and attract participation by other farmers. Additionally, the study recommends the introduction of a structured trading system in order to influence participation into the project.

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