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An Economic Analysis of Investment Pattern, Cost of Milk Production and

Profitability of Commercial Dairy Farms in Maharashtra

Article · July 2012

DOI: 10.5146/ijds.v65i4.25863

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Research Article

An Economic Analysis of Investment P attern,

Pattern,
Cost of Milk P roduction and P
Production rofitability of
Profitability
Commer cial Dair y FFarms
Commercial arms in Maharashtra
Avinash K. Ghule*1, N. K. Verma 1, A. K. Cahuhan1 and Pravin Sawale2

National Dairy Research Institute, Karnal-132001 (Haryana)

Dairying in India has traditionally been a small holders' enterprise. As the demand for milk and
milk product is increasing rapidly, milk producers have been adopting dairy farming on
commercial scale to tap the market opportunities. The present study conducted on 40 commercial
dairy farms in Ahmednagar district of Maharashtra (India) in the year 2009-10 analyses their
capital investment, cost and returns and the profitability. The farms were classified into small,
medium and large categories based on herd size. Small, medium and large dairy farms maintained
10.55, 14.11 and 34.66 milch animals respectively. The average investment per farm was
estimated to be Rs. 12.17 lakhs. The share of dairy animals in total investment ranged from
51.28 % (small farms) to 70.12 % (large farms). The average productivity of cross-bred cattle was
9.72, 9.58 and 9.49 litres of milk per day for small, medium and large category of commercial
farms; while per litre cost of milk production thereon were Rs. 12.49, Rs.12.58 and Rs. 11.48
respectively. The net return over cost per litre of cow milk produced was Rs. 2.16. All the farms
were financially viable earning a net profit of Rs. 1,91,458 per farm per year.

Keywords: Commercial farms, Investment, Cost, Profitability

INTRODUCTION and urban areas respectively (NSS 64th round).

D awitnessed
irying in India, over the years, has
a sea change from a largely
The changing economic scenario throws open the
challenges as well as the underlying opportunities
unorganized activity into a blooming organized to increase milk production with the help of
industry. Dairy Industry is one of the fastest scientific breeding, feeding and management of
expanding industries in the world. India ranks huge livestock wealth India possesses so that milk
first in world milk production, its production supply side matches the demand side effectively.
having increased from 17 million tonnes in 1950- Dairying in India has traditionally been a small
51 to 121.8 million tonnes by 2010-11 (Economic holders' enterprise. As the demand for milk and
Survey 2011-12). The demand for milk is projected milk product is increasing rapidly, a shift in the
to be 181 million tonnes by 2020 (India Vision production paradigm is quite visible. The milk
2020) which shall be further propelled due to producers are scaling up their milk production
increasing middle class population with high capacities and adopting dairy farming on
disposable income along with fast changing socio- commercial lines to tap the market opportunities.
economic and cultural values and health As a result many commercial dairy farms have
consciousness. Milk and milk products in India come up in the country.
are consumed by 77.5 per cent of rural and 88.7 Investment pattern on a dairy farm largely
percent of urban households and these food items depends on the returns obtained from them.
find an important place in their diets. The Earlier studies on economics of milk production
average monthly per capita expenditure on milk (Pant and Karanjkar 1965; Chattraji and Singh
and milk products is Rs.60 and Rs.107 in rural 1989; Chand et al. 2002; Kumar 2003; Desai

*1 Author for corrospondance: Email: [email protected]

2 Dairy Economics, Statistics and Management Division, National Dairy Research Institute, Karnal (Haryana)
3 Dairy Technology Division, National Dairy Research Institute, Karnal (Haryana)
The paper is part of first author's M.V.Sc. Thesis (2010) submitted to National Dairy Research Institute (Deemed
University), Karnal (Haryana).
2012-053 Received:February 2012; Accepted:July 2012

329 Indian J. Dairy Sci. 65(4), 2012

Avinash K. Ghule et al.

2005; Singh 2008) indicated that the share of commercial dairy farms were selected on the
investment on animal remains the highest basis of probability proportionate to the number
followed by buildings and equipment. of dairy farms in each category.
Observing the cost of production is one of the Primary data on various aspects of milk
foremost factors that one has to inevitably production enterprises were collected from each
consider in accessing any commercial enterprise. of the selected dairy units by personal interview
The profit of the firm can be maximized either method. The data were scrutinized, tabulated
through maximization of returns or minimization and subjected to tabular analysis. The following
of cost. Individual producer have little control methodology was adopted to analyse investment
over returns being largely dependent on external pattern, cost of milk production and profitability
environment of the firm. Hence cost on sample commercial dairy farms.
minimization is an important tool in the hands Capital Investment
of entrepreneur through which profit could be
The fixed investment on a commercial dairy
maximized. The studies on the commercial dairy
farms comprised of investment on animals
farms (Pant and Karanjkar 1965; Chand et al.
including milch animals, young stock and heifers,
2002; Shergill 2006) reported that feed cost was
bulls and draft animals, investment on cattle
the major cost component in the total expenses.
shed and stores, machinery and equipments.
There were a large inter farm-group variations
regarding cost of milk production and earnings. Costs and Returns Concepts
The study on maintenance cost per milk animal Fixed Cost: It includes interest on fixed capital
(Autkar et al. 1995) showed that the major items and depreciation on animals, cattle sheds and
of maintenance cost were feed, human labour machinery. The interest on fixed capital was
and interest on working fixed capital. worked out at the then prevailing rate of interest
i.e. at 7.50 per cent per annum. Depreciation
DATA AND METHODOLOGY
on fixed capital was worked out separately for
Commercial dairy farming is being done in parts
milch animals, cattle shed, machinery and
of western and eastern Maharashtra and has
equipments keeping in view the present value
taken considerable momentum in the other parts
and useful economic life of the capital asset.
of the state. Some regional trend in the growth
of the dairy sector, in fact, suggests that there Depreciation rate on milch animals was worked
is a sufficient scope for further improvement as follows:
in the dairy sector in Maharashtra. Ahmednagar Cross- bred cows - 8 per cent (productive
district was selected purposively as it ranks life 12.5 years),
first in milk production in the state and has
Local cows and Buffaloes - 10 per cent
well developed dairy infrastructure.
(productive life 10 years),
Geographically the district is positioned at the
centre of the state having easy access to some Depreciation rates on cattle shed, stores and
important markets like Mumbai, Thane, Pune, dairy equipments were applied as under
Nashik and Aurangabad cities. This led to Particulars Depreciation rate
establishment of a large number of commercial per annum (%)
herds in the area.
Pucca building 2
Two tehsils, Sangamner and Rahuri from
Semi-pucca building 5
Ahmednagar district were selected randomly and
from each tehsil, a cluster of six villages having Bullock cart 10
maximum number of commercial dairy farms Chaff cutter 10
were identified. To select a sample of commercial
farms, complete enumeration of commercial dairy Milk cans and petty items 20
farms in these villages was done. The As the commercial dairy farm maintained
commercial dairy farms based on herd size were animals of different species and age groups, to
categorized into three classes namely small, determine the relative share of fixed cost
medium and large using cumulative square root attributable to milch stock, the livestock
frequency method of stratification. Finally 40 maintained at the farm were converted into

330
 Commercial Dairy Farms in Maharashtra

Standard Animal Units (SAU's) as per the Net Cost = Gross Cost - Imputed value of dung
methodology suggested by Patel, R. K., et al. 1983. iv) Cost per Litre of Milk Production
The fixed cost was apportioned on the basis of
Standard Animal Units the following relative In order to estimate the cost per litre of milk,
weights were assigned the average net maintenance cost per animal
per day was divided by average milk production
Local cow = 1.00 per animal per day, i.e.
Crossbred cow = 1.40
Buffalo = 1.30 Net maintenance cost per
Crossbred heifer (> 1 yr.) = 0.75 animal per day
Crossbred heifer (> 2 yr.) = 1.00 Cost Per Litre (Rs.) = ------------------------------
Buffalo/Local calves (> 1 yr.) = 0.50
Total milk produced per
Buffalo/Local heifer (> 2 yr.) = 0.75
animal per day
Other calves (< 1 yr.) = 0.33
v) Gross Returns:
i) Variable Costs
Gross returns were obtained by multiplying milk
These costs include feed cost, labour cost, yield of an individual animal with respective
veterinary cost and other miscellaneous costs. prevailing price of milk in the study area, i.e.
Feed cost: The cost incurred on green fodder, Gross Returns = Quantity of milk x
dry fodder and concentrate to feed the animals Market price of milk
constituted feed cost. It was worked out by
multiplying quantities of feeds and fodder Price of Milk: The price of milk differs according
consumed by animals with their respective to type of milk and the season. The weighted
prevailing prices in the study area. All the average price of milk was calculated for each
commercial farms adopted collective stall-feeding commercial farm as under:
of their animals. To apportion the joint costs Σ Pi . Wi
on feeds and fodder, standard animal units Weighted average price = ---------------
approach was applied. Σ Wi
Labour Cost: It included family as well as paid Where,
hired labour. The hired labour was calculated
Pi is the price per litre of ith type of milk, and
considering time utilised in various dairy
Wi is the total quantity in volume of i th type of
activities and wages paid. In case of family
milk sold by the farm.
labour, the imputed value was taken as per the
prevailing wage rate of casual labour in the study Net Returns:
area. Net returns were calculated by subtracting net
Veterinary Cost: It included the cost incurred cost from gross returns, i.e.
on natural service, artificial insemination (A.I.), Net Returns = Gross Returns - Net Cost
vaccination, medicines and other charges/fees
Profitability
of veterinary doctors.
The profitability of each category of farm was
Miscellaneous Costs: The cost on repairs, worked out on the basis of milk supplied to various
electricity, water charges, bucket, rope, etc agencies, milk retained at home and net returns
formed this group. over cost per litre of milk produced.
ii) Gross Cost: It was obtained by adding all RESULTS AND DISCUSSION
the cost components included in the fixed and The number of commercial dairy farms selected
variable costs, i.e. in each category is presented in the Table 1.
Gross Cost = Total Fixed Cost Socio-Economic Profile of the Commercial Farms
+ Total Variable Cost
The information relating to family size,
iii) Net Cost: The net cost was reckoned by educational status, land holding etc. of the dairy
deducting the imputed value of dung, from the owners have been analysed and presented below
gross cost, i.e. in Table 2.

331 Indian J. Dairy Sci. 65(4), 2012

Avinash K. Ghule et al.

Table 1: Selection of Sampled Commercial Farms in Ahmednagar District

Category Total number of Farms selected
commercial dairy farms
Small ( 10 to 12 milch animals) 115 22
Medium ( 13 to 15 milch animals) 46 9
Large ( 16 and above milch animals) 48 9
Total 209 40

The average size of family on commercial farms Herd Type

was 12.5 members. The average number of family Type of the herd adopted on the commercial
members was observed to be maximum on farms is an important indicator of the preference
medium farms (15.10) whereas this figure in of dairy owners of a particular region for a
case of small and large farms was 11.10 and particular breed/species. Data regarding type
11.34 members respectively. Educational status of farm maintained on the sample commercial
was operationalized as the level of formal farms is presented in Table 3.
education attained by the individual respondent
These commercial farms have been classified
as followed by Bhuvaneshwari (2005)*. The mean
as pure cattle farm i.e. the farms which
education score of the head of the commercial
maintained only cattle i.e. both, either crossbreds
dairy farm is lowest (3.54) in case of small
and/or local cows. The mixed farms were those
category and highest (5.0) for large category of
commercial farms which kept a mix of cattle
sample dairy farms. The overall mean
and buffaloes or only crossbred cattle herds and
educational score was 4.25, which suggests that
buffalo herds. It can be seen that, maximum
most of the heads of the sampled farms had
farms were found to be pure cattle farms (92.50
high level of formal education.
%) whereas mixed farms were only 7.50 %. Most
The average operational land holding for small, of the small farms were found to be pure cattle
medium and large farms was 4.83 hectares, farms and only one farm in this category was
5.52 hectares and 15.24 hectares per commercial found to be a mixed farm. In medium category
farm respectively. Majority of commercial farms of commercial farms, all farms were found to
on an average own more than 4 hectares of be cattle farms maintaining cross-breds only.
land. As far as area under fodder crops is In case of large category of farms again seven
concerned, it was interesting to observe that out of nine farms were pure cattle farms.
area devoted for fodder cultivation increased
It was particularly interesting to observe here
with the farm size to meet the higher demand
that, amongst the sampled commercial farms
for fodder. The proportion of operational land
not a single farm had local cow in its milch
holding used for growing fodder was highest for
stock. It emerged prominently that the main
medium category (28.63%) followed by small
reason for not maintaining local cattle in the
(24.86%) and large (15.09%) farms. The
milch stock is the low productivity of the local
commercial farms on an average had about 21%
cow. The exotic breeds of animals which were
of their operational land holding reserved for
observed on the sample farms included Holestien
fodders only.
Fresian (HF) and Jersy crosses. High grade

Table 2: Category-wise Family Size, Education status and Land holdings

of the Sample Commercial Farms
Category Number of Average Education Land holding Percentage of
farms Family size status of head per farm (ha.) area devoted
of farm* for fodder crops
Small 22 11.1 3.54 4.83 24.86
Medium 9 15.1 4.22 5.52 28.63
Large 9 11.3 5.00 15.24 15.09
Overall 40 12.5 4.25 7.32 20.92
*mean education score worked out as followed by Bhuvaneshwari

332
 Commercial Dairy Farms in Maharashtra

Table 3: Type of Dairy Herd Adopted on Commercial Dairy Farms

Description Small Medium Large Overall
No. of commercial farms 22 9 9 40
(100.00)
Farm Type
Pure cattle farms 21 9 7 37
(92.50)
Mixed farms (Buffalo + CB) 1 - 2 3
(7.50)
Average milch animals per farm 10.59 14.11 34.66 16.80
Figures in parentheses are the percentages to total farms (i.e.40)

Murrah buffalo was the preferred breed amongst stores (36.92%) and machinery and equipments
majority of the commercial farms which had (6.68%).
maintained buffaloes. The breakup of animals according to their kind
Investment Pattern revealed that milch animals constituted 44.11
Level of investment reflects the extent of percent, heifers 8.12 percent, young animals
business activity and its income generating below one year nearly 3 percent and draft animals
capacity in the long term. On the commercial 1.45 percent of the total investment on livestock.
dairy farms, fixed investment comprised of The investment on milch animals in absolute
investment on animals, cattle shed and stores, terms on an average was Rs. 6.40 lakhs due to
machinery and equipments etc. The total capital quality breeds of animals reared and high prices
investment on various heads across commercial of crossbred cattle and buffalo in the region.
dairy farms is reflected in Table 4. The average Across different commercial farm size categories,
capital investment per farm on sample the pattern of investment was observed to be
commercial farms was found to be Rs 12.17 almost similar, but its magnitude differed
Lakhs indicating that commercial dairy farming considerably. As expected, the overall investment
is a highly capital intensive business. The dairy in fixed capital increased with the farm size.
animals alone constituted nearly 56.40 percent The share of dairy animals in total investment
of total investment followed by cattle sheds and was found to be 51.28 percent on small farms,

Table 4: Investment Pattern on Sample Commercial Dairy Farms (000' Rs/farm)

Sr.No. Items Category of Commercial Farm
Small Medium Large Overall
A) Animals
i) Milch animals 260.17 367.83 1,842.58 640.38
(41.20) (41.81) (53.51) (44.11)
ii) Heifers 41.09 57.50 2,44.06 90.45
(6.19) (6.85) (14.11) (8.12)
iii)Calves 16.27 31.93 47.38 26.79
(2.38) (3.88) (2.40) (2.72)
iv)Draft animals 45.40 48.75 80.00 53.94
(1.51) (2.65) (0.09) (1.45)
Total ( i to iv) 3,62.83 506.02 2,214.01 811.56
(51.28) (55.19) (70.12) (56.40)
B) Buildings 294.22 327.89 483.33 344.35
(41.48) (36.79) (25.91) (36.92)
C) Machinery, equipments and others 47.14 69.68 84.473 606.12
(7.24) (8.02) (3.98) (6.68)
Total Investment (A+B+C) 704.20 903.58 2,781.82 1,216.52
(100.00) (100.00) (100.00) (100.00)
Figures in parentheses are the percentage to total investment

333 Indian J. Dairy Sci. 65(4), 2012

Avinash K. Ghule et al.

Table 5: Cost and Returns on Different Categories of Commercial Dairy Farms

Cross-bred cattle Buffalo
Farm size Small Medium Large Large
Green fodder 29.47 29.65 28.04 23.87
(23.31) (23.59) (24.58) (22.71)
Dry fodder 19.50 18.57 19.11 24.27
(15.42) (14.78) (16.75) (23.09)
Concentrate 38.04 40.92 32.68 23.72
(30.09) (32.56) (28.65) (22.56)
Total feed cost 87.01 89.14 79.83 71.86
(68.82) (70.93) (69.97) (68.36)
Labour 11.42 10.03 8.60 7.6
(9.03) (7.98) (7.54) (7.23)
Veterinary 3.40 3.13 2.37 2.9
(2.69) (2.49) (2.08) (2.76)
Miscellaneous 2.72 2.80 2.55 1.82
(2.15) (2.23) (2.24) (1.73)
Total Variable Cost 104.55 105.10 93.35 84.18
(82.69) (83.63) (81.82) (80.08)
Depreciation on fixed assets 11.89 11.09 11.59 12.3
(9.40) (8.82) (10.16) (11.70)
Interest on fixed capital 10.00 9.48 9.15 8.64
(7.91) (7.54) (8.02) (8.22)
Total Fixed Cost 21.88 20.57 20.74 20.94
(17.31) (16.37) (18.18) (19.92)
Gross cost 126.43 125.67 114.08 105.12
(100.00) (100.00) (100.00) (100)
Value of dung 5.04 5.15 5.14 6.04
Net Cost 121.39 120.52 108.94 99.08
Sale price of milk (Rs./litre) 14.06 13.94 14.79 27.5
Milk production (litres) 9.72 9.58 9.49 3.7
Gross return 136.66 133.55 140.22 101.74
Net Return 15.27 13.03 31.28 2.66
Cost per litre of milk (Rs./litre) 12.49 12.58 11.48 26.78
Net Returns per litre (Rs./litre) 1.57 1.36 3.30 0.72
(Rs. per animal per day)
Figures in parentheses are the percentage of gross cost

55.19 percent on medium farms and 70.12 analysis is done separately for different species
percent in case of large farms. of milch animals to have a better insight of
It can be concluded from the analysis that the species wise economics of milk production.
large farms have invested maximum share of The overall gross cost of maintenance of a cross-
their fixed capital in the dairy animals whereas bred milch cattle on small category of sampled
on the small farms relatively more investment farm was estimated to be Rs. 126.43 per per
was done on the development of infrastructure. day. The variable cost was about 83 per cent of
This is due to different pattern of housing used the gross cost whereas the fixed cost component
on different categories of commercial farms. was 17 per cent. Cost on feeds and fodder was
Cost and Returns from Milk Production the major cost component, which formed about
69 percent of the total cost of maintenance.
The maintenance cost of a milch animal includes
cost on feeds and fodder, human labour, interest The average milk yield of cross-bred milch animal
and depreciation on fixed assets and on small farms was found to be 9.72 litres per
miscellaneous recurring expenses less income day. The overall cost per litre of milk was found
from dung. A detailed component wise cost of to be Rs. 12.49. As far as returns from the dairy
milk production is presented in Table 5. The animals are concerned, milch animal gave, an

334
 Commercial Dairy Farms in Maharashtra

overall net return of Rs. 15.27 per animal per medium farms. The large farms were found to
day, whereas the net returns per litre of milk be more economical in terms of manpower
was Rs. 1.57. utilization. The net cost per litre on sampled
The gross cost of maintenance of crossbred milch commercial farms worked out to be lowest in
cattle on medium category of commercial farms the large category and highest in the medium
was estimated to be Rs. 125.67 per animal per category.
day. The share of total fixed cost and total variable Maintenance cost of milch buffalo on large
cost in the total cost on these farms was 16.37 commercial dairy farms was Rs.105.12 per animal
percent and 83.63 percent respectively. The per day in which variable costs accounted for
average milk yield of crossbred milch animals about 80.08 per cent of the cost of maintenance.
on medium farms was found to be 9.58 litres A relative lower cost on concentrates fed resulted
per day resulting into overall cost of milk into lower cost of maintenance. However due to
production at Rs. 12.58 per litre. The milch a significant number of animals gone dry at
animals could generate a net return of Rs. 13.03 these farms the average milk productivity per
per day generating a surplus of Rs. 1.36 with milch animal turned out to lower causing milk
each litre of milk produced. The gross cost of production cost to escalate to Rs. 26.28 per litre.
maintenance of a crossbred milch cow on the Returns from the buffaloes on large commercial
large category of sample farms was Rs. 114.08 farms showed that each milch buffalo earned
per day in which fixed and variable costs shared overall a net return of Rs. 2.66 per day. Though
18.18 per cent and 81.82 per cent of total cost buffalo milk fetches a good price in the region,
respectively. The feeds and fodder cost accounted i.e. Rs. 27.50 per litre, the overall net returns
for around 70 percent of the gross cost. In feeding were relatively low contributing to the extent of
cross-bred milch animal the cost incurred per Rs. 0.72 per litre of milk.
day on green fodder, dry fodder and concentrates Profitability of Commercial Dairy Farms
was Rs.28.04, Rs.19.11 and Rs.32.68 respectively.
To work out category wise profitability of
The average yield per milch animal on large commercial dairy farms cost and returns were
farms was found to be 9.49 litres per day and worked out which are presented in Table 6.
the net cost milk production was worked out to
It may be observed from the table 6 that small
be Rs.11.48 per litre against the average sale
category of commercial dairy farms generated a
price of milk of Rs.14.79 per litre. On this category
net surplus of Rs. 1,92,898 per annum whereas
of farms each milch animal yielded an average
the medium category of farms lagged behind with
a net return of Rs. 31.28 per day which turns
a surplus of Rs 67,216, the obvious reason was
out to be Rs. 3.30 per litre of milk produced. It
found to be that they had stock of more number
could be inferred that feeds and fodder being
of dry animals which eat in to their profits.
the major cost items of cattle maintenance they
The large commercial farms earned net profit
had profound effect on the economies of
of Rs. 3,12,178 per year. All the farms were found
commercial dairy farms.
to be financially viable, earning net profit of
The study revealed that the net cost of milk Rs. 1,91,458 per year.
production in case of cross-bred was found highest
CONCLUSIONS
on the medium category of commercial farms
Commercialisation in dairy farming has
and lowest in the large category. This was due
contributed to increase in income levels of
to higher cost incurred on feeds and fodder on

Table 6: Cost and Returns across Different Categories of Commercial Dairy Farms
Category No. of farms Total cost/day/farm Revenue Net Income/ Net income
(Rs) (Rs) day/farm (Rs) per farm per year
(Rs)
Small 22 1,631 2,159 528 1,92,898
Medium 9 1,736 1,920 184 67,216
Large 9 4,155 5,010 855 3,12,178
Overall profits per farm per annum 1,91,458

335 Indian J. Dairy Sci. 65(4), 2012

Avinash K. Ghule et al.

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