Flour Mill or Dairy: A Self-Help Group's Choice
The Durga Mahila Self-Help Group in a Vidarbha village has 14 members who have saved Rs 1,20,000 over three years. The bank offers a MUDRA loan of Rs 3,00,000 at 9% for five years, with a monthly instalment of about Rs 6,230. Two proposals are on the table. A flour mill: machine Rs 2,40,000, shed and installation Rs 60,000, electricity deposit Rs 20,000; power, wear and hired help cost Rs 4 per kg; customers would pay Rs 8 per kg; the group expects 4,000 kg a month, since the only other mill, in the next village, charges Rs 9. A dairy: six crossbred cows for Rs 3,60,000; feed and veterinary care Rs 6,000 per cow per month; each cow gives about 12 litres a day at Rs 32 a litre, but in a drought year fodder costs 40% more and yield falls to 8 litres. In both cases two members would work full time on the venture instead of earning Rs 4,500 a month as farm labour.
1. Calculate the monthly surplus of each option in a normal year, after the loan instalment but before paying the two members for their time.
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Flour mill. Revenue: 4,000 kg x Rs 8 = Rs 32,000. Variable cost: 4,000 kg x Rs 4 = Rs 16,000. Contribution = Rs 16,000. Subtract the instalment of Rs 6,230, leaving about Rs 9,770 a month.
Dairy. Output: 6 cows x 12 litres = 72 litres a day, at Rs 32 = Rs 2,304 a day, or about Rs 69,120 for 30 days. Feed and veterinary cost: 6 x Rs 6,000 = Rs 36,000. Surplus before instalment = Rs 33,120; after Rs 6,230, about Rs 26,890 a month.
On this arithmetic the dairy earns nearly three times as much as the mill. Both are comfortably above zero, so the loan is serviceable either way, but the gap is large enough that the group should ask what the dairy is being paid for: more capital, more daily labour, and more risk.
2. Should the value of the two members' time be counted? Work out the opportunity cost and say whether it changes the choice.
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Yes, because that time has an alternative use with a known price. Opportunity cost is the value of the next best option given up.
Two full-time members foregoing Rs 4,500 each means Rs 9,000 a month.
Flour mill: Rs 9,770 minus Rs 9,000 leaves roughly Rs 770 a month. The mill is not creating income; it is converting two wages into one near-identical income, and tying up Rs 1,20,000 of savings and a loan to do it.
Dairy: Rs 26,890 minus Rs 9,000 leaves about Rs 17,890, which is real additional income for the household and for the group's fund.
The conclusion changes sharply for the mill, not for the dairy. A venture that only breaks even once unpaid labour is priced should be reconsidered or run part-time, with the machine used around existing farm work rather than replacing two incomes. Accounting profit and economic profit are not the same thing.
3. Given drought risk, which option would you recommend and on what conditions?
Read the worked answer
The dairy wins on arithmetic but carries a tail risk the mill does not.
In a drought year, fodder costs rise 40% to Rs 50,400 and yield falls to 8 litres per cow, giving 48 litres a day x Rs 32 = Rs 1,536, or Rs 46,080 a month. That is a loss of about Rs 4,320 before the instalment and about Rs 10,550 after it. A single bad year can wipe out two good ones, which matters because the loan instalment does not pause for drought.
Recommendation: start the dairy, but only with three safeguards. Secure a written milk procurement arrangement so price and pickup are not renegotiated monthly. Insure the animals and build a fodder reserve in good years. Keep the group's own savings as a buffer rather than spending all of it on the shed.
A defensible alternative is a phased start with four cows and the mill retained for off-season use, accepting lower returns in exchange for not betting the whole loan on one monsoon.