Bulk Milk Cooler Investment in a Primary Cooperative
A primary milk producers' cooperative society has 220 members and collects 3,600 L/day, all sold raw to a private dairy at ₹30/L. Collection is in cans, twice daily, and milk reaches the dairy 7–8 hours after milking; during summer, 2–3% of cans are rejected for acidity. The federation offers ₹32.50/L for chilled milk of acceptable quality and a quality bonus of ₹0.50/L if somatic cell count is below 400,000 cells/mL and MBRT is over four hours. A 3,000 L bulk milk cooler costs ₹22 lakh installed; a 30% government grant is available, leaving ₹15.4 lakh to be financed by a bank loan at 10% interest with a five-year repayment. Chilling, power, testing and extra transport are estimated at ₹1.20/L. The society's meeting is divided: older members want the security of the private buyer, while younger members want the federation price. The private dairy has verbally offered ₹30.50/L for the next season.
1. Calculate the annual incremental benefit and simple payback, stating your assumptions.
Read the worked answer
Assume 365 collection days and that the quality bonus is earned. The price gain is ₹2.50/L from the federation plus ₹0.50/L bonus, or ₹3.00/L. Annual volume is 3,600 × 365 = 1,314,000 L, so incremental revenue is 1,314,000 × ₹3.00 = ₹39.42 lakh. Additional operating cost is 1,314,000 × ₹1.20 = ₹15.77 lakh. Year-one interest on ₹15.4 lakh at 10% is about ₹1.54 lakh, and straight-line depreciation on the ₹22 lakh asset over ten years is ₹2.20 lakh. Net annual benefit is therefore about ₹39.42 − 15.77 − 1.54 − 2.20 = ₹19.91 lakh. Simple payback on the society's ₹15.4 lakh commitment is 15.4 ÷ 19.91 ≈ 0.77 year, or about nine months. If the bonus is missed, revenue falls by ₹0.50/L (₹6.57 lakh), leaving about ₹13.34 lakh and a payback of about 1.15 years. Even the pessimistic case is attractive, but the calculation must be repeated with the society's actual collection days and the written federation price.
2. What non-financial and risk factors should the society weigh before deciding?
Read the worked answer
The financial case is strong, but the cooperative must be able to meet the quality conditions every day. Check whether the federation agreement is in writing, how long the price is guaranteed, and how the bonus is verified. A 3,000 L cooler for 3,600 L/day leaves little reserve, so peak collection and power failures need a plan. The society needs a trained operator, a backup generator or alternative power, spare parts, safe cleaning chemicals and a small testing facility or reliable access to one. Members must be convinced to deliver clean, cooled milk and to accept payment by quality, not only by volume; otherwise the bonus will not be earned. The loan repayment starts before the benefits are fully realised, and the 30% grant must be sanctioned in writing, not assumed. The private dairy's verbal ₹30.50/L offer is not a contract and may change. There is also a governance risk: if payments are delayed or the cooler breaks down, member trust can collapse quickly.
3. Recommend a decision and the conditions under which it should proceed.
Read the worked answer
The society should proceed, but conditionally rather than immediately. First obtain written confirmation of the grant and a written federation purchase agreement with the price, quality tests and payment period. Run a four-week quality trial with the existing milk supply to see whether SCC and MBRT targets can be met. Appoint and train a cooler operator and arrange backup power and a maintenance contract. Hold a general body meeting to explain the loan, the repayment schedule and the quality-based payment system, and obtain a recorded resolution. Start with the 3,000 L cooler and retain a written fallback arrangement with the private buyer for surplus or rejected milk. Monitor cost per litre, rejection rate, bonus achievement and loan repayment monthly. If the grant is delayed, the quality trial fails, or the federation will not commit in writing, the society should remain with the private buyer and improve can cooling first; the investment should not be made on verbal assurances alone.