India is the world’s largest producer of milk, with an annual output of 230 million metric tons (MMT), far surpassing the production of key crops like rice (129 MMT), wheat (110 MMT), and maize (35.91 MMT). Accounting for 24% of global milk production, India’s dominance in dairy farming is driven by its substantial livestock population. The Milk Revolution, which began in 1970, played a pivotal role in transforming India into a major milk producer, with the country surpassing the United States in 1997 to claim the top spot. Dairy farming has long been a cornerstone of the Indian economy, providing crucial livelihoods for small and marginal farmers. What began with the cooperative movement has now evolved into a thriving industry, establishing dairy as a promising and vital sector within India’s agricultural economy.
To achieve higher productivity per animal, there is growing demand in allied industries such as cattle feed, green and dry fodder, silage, supplements, medicines, and machinery. Farmers are also increasingly investing in advanced technologies to improve their operations. However, a significant gap remains in the financial education and economic understanding of Indian dairy farmers, which hinders their ability to make informed decisions.
During the challenges posed by COVID-19, Indian dairy farmers embraced the digital revolution, gaining valuable knowledge that facilitated the transfer of better technologies. In recent years, however, they have faced new setbacks, including the outbreak of Lumpy Skin Disease (LSD), which severely impacted the immunity of dairy cows. Additionally, extreme heatwaves have further affected milk production. Amid these challenges, farmers are struggling to maintain profitability. As a result, focusing on farm management, economics, and sustainability has become crucial for improving profitability while ensuring quality milk production and the long-term success of dairy farming in India.
Economics of Dairy Farming
A dairy farmer must understand the per-litre cost of milk production to gain insight into the profitability or potential losses of their business. This knowledge is crucial for effective decision-making and financial planning. The goal is to educate farmers about the backyard dairy farming business model, helping them optimize operations for better financial outcomes. By gaining a deeper understanding of costs and profitability, farmers can make informed choices and improve their business strategies. Let’s now transition from traditional dairy farming to a more structured and sustainable dairy business model.
Milk Production Cost Breakdown
Basic Requirements for Starting a 10-15 Cow Dairy Farm:
- Land: For loose housing, each adult cow requires 300 sq. ft. of space. For 15 cows, this totals around 4,500 sq. ft. or approximately 418 sq. meters.
- Cow Purchase: The cost of purchasing a medium-producing cow ranges between INR 60,000 to INR 80,000 per animal. For buffaloes, the cost can increase to INR 80,000 to INR 1,30,000 per animal.
- Farm Infrastructure: This includes the actual cost of erecting sheds and constructing the dairy farm, which varies depending on the type of housing (closed or open).
- Utensils and Equipment: Costs for necessary tools and machinery, such as milk cans, milking machines, chaff cutters, foggers, and milk coolers, must also be considered.
Estimated Total Budget: For a 10-15 cow farm, the total initial budget is estimated at INR 12-15 lakh. Of this, approximately 50% is allocated for the purchase of milking animals.
Fixed and Variable Costs:
Like any business, a dairy farm incurs both fixed and variable costs, along with depreciation expenses.
- Depreciation Costs:
For example, if a cow is purchased for INR 75,000 and sold for INR 35,000 after 4 years, the depreciation cost per cow would be INR 10,000 per year. - Space Requirements:
- In a closed barn, each cow needs 50-70 sq. ft.
- For open or loose housing, 250-300 sq. ft. per cow is required.
- Construction Costs:
- The cost of constructing the farm building is around INR 250-300 per sq. ft. for enclosed spaces, and INR 100 per sq. ft. for open housing.
- The life of the construction is estimated at 25-30 years, with a depreciation rate of about 10% per year.
Utensils and Machinery Costs:
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- Equipment like milking machines, cans, dung trolleys, and chaff cutters typically have a shelf life of 8-10 years.
- These items are subject to an annual depreciation rate of 20%.
These cost estimates are averages and can vary by region, depending on construction costs, equipment prices, and other factors specific to the farm’s location. Understanding these costs is vital for effective farm management and ensuring profitability in the dairy business.
Day-to-Day (Variable) Costs for a Dairy Farm:
- Feed and Fodder Costs (Green and Dry Fodder):
A cow weighing 450 kg and producing 15 liters of milk daily requires around 13.5 kg of dry matter, which is 3% of its body weight. This includes:- Concentrates: 6 kg per day (300 gm per liter of milk and 1.5 kg for body maintenance).
- Dry Fodder: 4 kg per day.
- Green Fodder: 20 kg per day (with 80% moisture content).
Labor Costs:
This includes wages for hired workers as well as any family members helping on the farm. Even if family members are involved, their labor costs should be accounted for.
Utility Costs:
Expenses for electricity, water, and other essential utilities used on the farm should be factored in.
Veterinary and Healthcare Costs:
This includes the cost of veterinary services, medicines, and treatments, as well as artificial insemination services.
Insurance Costs:
On average, insurance costs for livestock are around 6% of the cost of the animal per year, protecting against losses due to illness, accidents, or other unforeseen circumstances.
These variable costs are essential to manage for maintaining smooth operations and ensuring the profitability of the dairy farm.
The above production cost does not include several important factors, such as:
- Bank EMI: Any loans or financing obtained for the dairy farm.
- Fixed Costs of the Farm: Including the cost of land, farm infrastructure, and other capital expenditures that do not change with production volume.
- Machinery and Equipment Costs: Costs for milking machines, cooling systems, and other machinery not already accounted for.
- Miscellaneous Expenses: Any additional costs that may arise, such as administrative expenses, transportation, or repairs.
- Profit Margin: The desired profit or return on investment for the farmer.
Additionally, the cost of rearing calves, heifers, and bulls has not been included in the above cost breakdown. These costs can be significant, depending on the farm’s breeding practices.
Farmers are encouraged to consider their actual costs, including these additional factors, when calculating the per-litre cost of milk production. This will provide a more accurate picture of the true cost and help in determining appropriate pricing and profitability.
The collection price for a cow producing 15 liters of milk, with profit included, can be broken down as follows:
When the government sets the Minimum Support Price (MSP) for a commodity, it takes several crucial factors into account to ensure that farmers receive a fair and sustainable price for their produce. These factors include:
- Total Production Cost: This includes the cost of inputs such as labor, feed, machinery, and other resources needed to produce the commodity. It also considers fixed costs like land, infrastructure, and capital investments.
- Required Resources: The government evaluates the amount of land, water, and other resources necessary for the production of the commodity. This helps determine the sustainability and economic feasibility of farming the particular commodity.
- Market Selling Price: The current selling price in the market is considered to ensure that the MSP reflects the market realities and that farmers are not selling below a sustainable price.
- Supply and Demand Dynamics: The government examines the demand for the commodity, both domestically and internationally, and compares it with the available supply. This helps forecast price stability and market conditions.
- Historical Price Trends: A study of the last 10 years’ price patterns helps identify seasonal variations, long-term trends, and cyclical price movements. This historical data provides a benchmark for setting a price that ensures farmers’ income stability.
- Inflation Index: The government accounts for inflation, which affects the cost of production and the purchasing power of consumers. Adjusting the MSP based on inflation helps maintain the economic viability of farming.
- Changes in Livelihood and Rural Economy: The government considers the economic conditions of farmers and their livelihoods, including changes in income levels, labor availability, and rural development factors. Ensuring that the MSP supports farmers’ well-being and economic stability is key.
- Economic Viability: Finally, the MSP must ensure that farming the commodity remains economically viable. The price should allow farmers to cover their costs and earn a reasonable profit, which incentivizes continued production and investment in agriculture.
By taking these factors into account, the government aims to provide farmers with a fair return while balancing the interests of consumers and the broader agricultural economy.
Every dairy farmer should regularly calculate the cost of producing one litre of milk to stay informed about their farm’s profitability. This periodic evaluation helps farmers:
- Track Production Costs: By calculating the cost per litre, farmers can identify changes in feed, labor, and other inputs, allowing them to respond to fluctuations in their expenses.
- Optimize Operations: Understanding the breakdown of costs enables farmers to make informed decisions about where they can cut costs or improve efficiency, such as adjusting feed practices or investing in better technology.
- Monitor Profitability: By keeping track of production costs and comparing them with milk prices, farmers can gauge their profitability, identify trends, and take proactive steps to maintain or improve their income.
- Adapt to Market Changes: Periodic updates on costs ensure that farmers can adapt to market conditions, such as fluctuations in milk prices, changes in input costs, or seasonal variations in feed availability.
By continuously monitoring and calculating the cost of milk production, farmers can make data-driven decisions that enhance the financial health and sustainability of their dairy operations.
By Dr. Parag Ghogale, Ruminant Nutrition Consultant
