Financial performance of small scale dairy farming in East Java Indonesia

Hari Dwi Utami and Ainun Pizar Seruni

Social Economic Department, Faculty of Animal Husbandry, Brawijaya University. Veteran Street, Malang, East Java, Indonesia.
(Post Code : 65145). Telephone: (0062)-341575748. Fax. : (0062)-0341 584727
hmamiek@yahoo.co.uk

Abstract

Milk consumption is growing faster by the year and it is mostly supplied by smallholder dairy farming that is more prevalent in rural areas. Small scale dairy farmers who raise less than five cows have relied on this farming as the main source of income because dairy farming can enhance job opportunity, providing daily income, and it leads to improving farmer’s welfare. It was interesting to insight the potential role of dairy farming for sustaining the livelihood among rural communities. Thus, the research objectives were to: (a) determine the earnings pursued by dairy farmer; and (b) investigate Revenue:Cost ratio (R/C ratio) of smallholder dairy farmers based on stratum. The research was done in Banjarejo Village, Ngantang Sub-District, East Java, Indonesia. 30 respondents were selected using total sampling method and categorised into three strata, stratum 1 (raised:  < 4 AU, n=19), stratum 2 (owned: 4 – 8 AU, n = 7), and stratum 3 (controlled : > 8 AU, n = 4). Survey method using a structured questionnaire was employed to gather data and was carried out from 1^st September to 1^st October 2014. Descriptive method with economic equation was performed to analyse the data.

Farmers who raised dairy cattle with less than four animal units were more profitable than other strata in  terms of obtaining more income (Rp.18,248,-/AU/day or US$1.52/AU/day ) and  achieving somewhat higher  (1.66) of R/C ratio.  Therefore, smallscale dairy farming can be useful  in generating household income and enhancing household labour opportunity for rural society.

Key words: economics, milk production, profit, R/C ratio, stratum

Introduction

Dairy farming represents an important source for providing milk requirement in Indonesia. Milk consumption has increased from  9.5 Kg/capita/year  in 2004 to 11 Kg/capita/year in 2008 (Industry Department  2009).  East Java accounts for 98% of the total dairy cow numbers in Indonesia.  As the centre of dairy cattle development, East Java has about 221,773 dairy cows with 1,034 tonnes/day of milk production by the year of 2010 (Animal Husbandry Department 2011). 

Dairying  is implemented as a traditional practise in milk production for a long time period and  mostly operated  by smallholders who have from 2 to 5 cows. Dairy farming as a part of a farming system has become increasingly important as an aspect of labour and income generating activities of farm households. Utami and Seruni (2013) discovered that household labour was allocated more to dairy farming compared to the farm and non-farm work and in which female participation was most evident in feed preparation and feeding, whereas the predominant male activity was forage collection for the dairy cattle.

Studies on livestock farming indicated that livestock can provide additional income and employment to households, especially in developing countries (Sansoucy 1995; Piraux et al 1996). Farming of dairy animals not only increases the level of expected income but also reduces the magnitude of income risk (Bhende and Venkataram 1994). For instance, the dairy cattle in Bangladesh are proposed as a supplementary income source for smallholders (Wimaladharma 1995). Similarly, dairy farming is found beneficial in terms of increasing income (Bhople et al 1992; Mullins et al 1996) and generating employment (Ravindra and Veerabhadraiah 1991). Therefore, dairy farming can increase villager’s life standards and growth income in the area where land holding is inadequate and unbalanced (Kocturk 2009). Mumba, et al 2011 found that smallholder dairy farming in Zambia has an important role in rural development and poverty alleviation. Dairy farming expenses were US$0.18 / litre, or 42.1% of the milk price, with US$ 0.43/ litre the revenue and it can obtain profit approximately US$ 0.25 or 57.9% of the milk price. Likewise, the study of Kavoi (2010) stated that the efficiency of smallholder dairy cattle in Kenya was determined by the educating farmer, keeping dairy records, developing extension programs, accessing credit and providing a good infrasructure. Hence, dairy farming has an important role in generating income and improving prosperity among the rural community. Thus, the research objectives were to: (a) determine the earning pursued in dairy farming by strata; and (b) investigate Revenue:Cost ratio of smallholder dairy farming based on strata.

Methodology

The research was done in Banjarejo Village,  Ngantang Sub-District, East Java, Indonesia. The objective of this study was to study financial performance of smallholder dairy farming in terms of cost production, revenue, income, and R/C ratio. Total sampling technique was used to determine 30 respondents. The respondents were then categorised into three strata, stratum 1 (raised :  < 4 AU, n=19), stratum 2 (owned : 4 – 8 AU, n = 7), and stratum 3 (controlled  : > 8 AU, n = 4). Survey method using a structured questionnaire was employed to gather data which was carried out from 1^st September to 1^st October 2014. Descriptive method with economic equation, including Total Production Cost, Revenue, Profit, and R/C ratio  were conducted to analyse the data as performed in the following paragraphs.

Total Production Costs

Total Production Costs represented all of the expenses to produce product either goods or services. It is composed by Fixed Cost and Variable Cost (Ibrahim 2009). It can be formulated as :

TC = FC + VC

where:

TC = Total Production Costs for yielding the  fresh dairy milk (Rp./year).

FC = Fixed Cost used for dairy cattle (Rp./year).

VC = Variable Cost used for  dairy cattle (Rp./year).

Revenue of Dairy Cattle

Revenue referred to compute the value of output. The revenue is defined as output multiplied by the price of output (Ibrahim 2009).  The equation of revenue is presented as :

TR =  Pq x Q

where:

TR = Total Revenue received from selling fresh dairy milk (Rp./year).

Q  =  quantity of fresh dairy milk  (litre./year).

Pq = The price of fresh dairy milk (Rp./year).

Profit or Income

Profit is defined by the subtraction between Total Total revenue with Total Production Costs (Ibrahim 2009). It can be stated as :

π =  TR - TC

where:

π  = Profit obtained from selling fresh dairy milk (Rp./year).

TR = Total Revenue received from selling fresh dairy milk (Rp./year).

TC = Total Production Costs used to yield fresh dairy milk (Rp./year).

R/C ratio

Revenue Profit ratio (R/C ratio) is the comparison between Total revenue and Total Cost. R/C ratio can be used to determine enterprise efficiency ( R/C ratio > 1 means efficient; R/C ratio =1 means zero profit; R/C ratio < 1 means inefficient (Soekartawi 2002). The equation can be presented as :

R/C ratio =  TR  :  TC

where:

R/C ratio  = The ratio between Total Revenue and the Total Cost for raising dairy

                   Cattle.

TR = Total Revenue received from selling fresh dairy milk (Rp./year).

TC = Total Production Costs used to yield fresh dairy milk (Rp./year).

Results and discussion

The Profile of Smallholder Dairy Farming   

Farmers aged 35 – 49 years old has dominated more in  stratum 1 (63.2% ) than those of stratum 3 (50%) and stratum 2 (42.8%).  Most farmers  had a primary education for stratum 1 (42.1%) and stratum 2 (42.9%), while half of farmers in stratum 3 had a higher level education. The experience in raising dairy cattle  (> 20 years)  was mostly from stratum 4 (50%) compared to stratum 2 (42.9%) and stratum 1 (42.1%). Majority of stratum 1 (52.6%) and stratum 2 (85.7%) have about 3-4 family members, whereas about  three fourth of farmers in stratum 3 were represented by 5-6  household members.

The Capital Structure of Smallscale Dairy Farming       

Capital has a potential role in representing the financial structure controlled by the smallholder dariry farming. It is divided into two types of asset, namely fixed asset and working capital  as seen in the following Table 1. Table 1 explained that investment requirement rose along with the increase of strata. Dairy farming in stratum 1 only needed a few assets about Rp. 34,606,945,- then rising up to Rp.65,676,415,- and 87,888,169,- for stratum 2 and stratum 3, respectively. Fixed capital increased from 75.5%  (stratum 1) to 90.8% (stratum 3), whereas for working capital it decreased from  24.5% in stratum 1 to 9.16% in stratum 3 (Table 1).

In regard to fixed assets, the value of dairy cattle has a higher (48.2%) proportion for stratum 2 than those of stratum 3 (47.6%) and stratum 1 (29.3%). Total fixed cost in working capital, however, represented a lower (1.1%) proportion  particularly from  stratum 3 in comparison with stratum  2 (1.34%) and stratum 1 (2.57%).

The Role of Small Scale Dairy Farming on Household’s Income   

Table 2 represents income statement or profit loss statement from dairy farming on the basis of stratum. In general, production costs, revenue and profit tend to incline as the increase of stratum. Revenue from dairy farming has fluctuated in respect to stratum, with the majority arising from stratum 1 (Rp. 45,862,-/AU/day). Revenue from dairy farming was primarily derived from milk which stratum 3 was marginally higher (89.25 %) than those from stratum 2 (88.28 %) and stratum 1(83.33%). Meanwhile, selling culled dairy cattle tended to decline as the stratum increased. It was  slightly higher for stratum 1 (6.23%) compared to stratum 2  (5.44 %) and stratum 3 (4.54%).

Interestingly, production costs slightly dropped from Rp. 24,870,- /AU/day (stratum 1) to Rp. 24,138,-/AU/day (stratum 2) and Rp. 23,231,-/AU/day (stratum 3). A high cost was provided for feed consumption which dominated dairy farming in stratum 1. On the contrary the expenses in medicine have a lower proportion of total production costs, and it fluctuated with range between 0.08% - 0.10  %. 

Even though, stratum 3 indicated a lower expenses  in operating dairy farming than other strata, however the higher profit  (Rp.18,248,-/AU/day) was achieved by stratum-1 which required a higher production costs in raising the livestock. This finding implied that dairy farming in stratum 1 can obtain more earning (Rp.18,248,-/AU/day or US$1.52/AU/day ) compared to those of  stratum 2  (Rp. 17,541,-/AU/day or US$1.46/AU/day) and stratum 3   (Rp. 17,021,-/AU/day or US$1.42/AU/day). The profitable farm in stratum 1  is due to the household labour involvement that can reduce the expenses in operating dairy farming. This finding was similar to Utami and Seruni (2013) that household labour including women have a higher participation in dairy farming sector, especially in developing countries. Likewise the previous study (Bhople et al 1992; Sansoucy 1995; 1995; Mullins et al 1996; and Piraux et al 1996) claimed that livestock farming can enhance earning for rural people who have  a limited access to land to have a good living standard (Kocturk 2009). Therefore, the rural labour empowerment in dairy farming will lift up their income and  it can be used as a mean to alleviate poverty among villagers ( Mumba et al 2011). Hence, small scale dairy farmes who owned less than  four Animal Units may become important for empowering rural labour since this farm can provide daily income, enhance household labour opportunity, and therefore it can improve rural household’s welfare.

Revenue Cost Ratio (R/C ratio) of Small Scale Dairy Farming

Efficiency in raising dairy farming was measured through R/C ratio and figured in Table 3. Smallholder dairy farming indicated efficient (R/C ratio >1) in rearing dairy cattle irrespective of stratum, with the slightly higher of efficiency arising from stratum 1 (1.66).

The higher ratio (1.66) implied that Rp. 1,000,000,- expenses in stratum 1 can yield  Rp. 1,660,000,- of  revenue  and obtain Rp. 660,000,- of profit. Hence, smallholder dairying in stratum 1 was more efficient than those for stratum 2 and stratum 3 in operating dairy farming.

Conclusions

 An investigation on small scale  dairy farming discovered that  stratum 1 (owned : < 4 AU) was more profitable than  stratum 2 (raised : 4-8 AU and  stratum 3  (controlled : >  8 AU).   Small scale dairy farming who owned less than  four Animal Units may become important particularly for empowering rural labour since this farm can provide daily income, enhance household labour opportunity, and therefore it can improve rural household’s prosperity. This evidence was based on the following findings.

• Dairy farming in stratum 1 required a higher (Rp. 27,614,-/AU/day) or US$ 2.30 production cost than those of stratum 2 (Rp. 26,889,-/AU/day or US$ 2.34), and stratum 3 (Rp. 26,271,-/AU/day or US$ 2.19).

  
  

• Revenue of dairy farming was higher (Rp. 45,862,-/AU/day or US$ 3.82) for stratum 1 in comparison with stratum 2 (Rp.44,440,-/AU/day or US$ 3.70) and Stratum 3 (Rp.43,292,-/AU/day or US$ 3.62 ).

  
  

• Dairy farming in stratum 1 can obtain more earning (Rp.18,248,-/AU/day or US$1.52/AU/day ) compared to those of  stratum 2  (Rp. 17,541,-/AU/day or US$1.46/AU/day) and stratum 3   (Rp. 17,021,-/AU/day or US$1.42/AU/day).

  
  

• R/C ratio for small-scale dairy farming stratum 1 appeared somewhat higher  about 1.66 compared to those approximately 1.65 of either  stratum 2  or stratum 3. 

References

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Received 29 May 2014; Accepted 17 October 2014; Published 3 November 2014

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