The buying and selling of cattle is an important livelihood activity across rural India. However, dairy farming for most farmers is not profitable when one imputes the full economic costs including the cost of labour. Although there are over 70 million dairy farmers in India today, they are often unable to turn dairy farming into a profitable activity due to constraints with respect to access to markets and good prices, unavailability of inputs such as artificial insemination, lack of knowledge in best practices and of customised cattle finance products.

But small dairy farms consisting of 2-3 animals will continue to predominate in rural areas given that milk production is a good supplementary activity and that there are few alternative employment opportunities for small and marginal farmers. Given this scenario, the question then is how can one release the constraints that dairy farmers face in increasing their revenues?

It has been observed that loans for the purchase of cattle contribute to as much as 48 per cent of an MFI's portfolio. Given the structure and outreach of MFIs, the Microfinance Strategy Unit (MSU) is supporting them in developing partnerships between public and private entities. The MSU has identified three major constraints that farmers face that need to be addressed in the following order: market, dairy farming practices-particularly feeding-and breed. Added to this is the need for innovative cattle finance and working capital loans.

The first priority to encourage farmers to invest in dairy farming or to expand the size of their herd is to be able to get a good and secure price for their milk. A farmer who can predict his/ her cashflows and receives a price that depends upon quality has an incentive to increase involvement in dairy farming and to adopt practices that will improve the quality of the milk produced. The MSU recently initiated a partnership between Reliance Industries Ltd and BASIX a livelihood promotion institute based in Andhra Pradesh. RIL has already started setting up the necessary cold chain infrastructure to procure and transport the milk while BASIX will be aggregating producers to supply milk to Reliance. Apart from financing the livestock, BASIX will also support its clients with extension services such as artificial insemination and training on best feeding practices.

Once a market has been established it can be leveraged to its maximum benefit by increasing productivity. The major constraint that farmers face here is in terms of feeding practices. Though farmers have access to low cost fodder this is not necessarily an optimal solution since poor nutrition also leads to less than optimal milk yields. The MSU is currently working with Godrej Agrovet Ltd, a concentrate cattle feed producer, to supply quality feed to milk producers through the MFI network of customers. Apart from that they also plan to initiate a pilot project in Telengana , Andhra Pradesh whereby farmers will be trained in the use of Total Mixed Rationing. Total Mixed Rationing is a technique of mixing concentrates, dry fodder, green fodder and feed supplements together into a uniform mix and feeding animals specific portions each day rather than feeding ingredients separately and arbitrarily. The MSU plans to design and implement a business model whereby feed grinders can be run as a separate sustainable business enterprise by local entrepreneurs. If successful, they plan to replicate this with MFIs across the country.

Once farmers have a market and are able to increase the production capacity of their animals they will also be ready to move on to more productive breeds. Such breeds require more attention and therefore one has to have knowledge of good feeding practices prior to investing in them. The MSU is working with MFIs to develop innovative cattle finance products to be distributed by MFIs that will allow farmers to scale up their business more efficiently. For instance, the cattle loans offered by MFIs currently range between Rs 4,000 (USD 89) and Rs 10,000 (USD 222). However, a quality cattle breed would mean an additional investment of Rs 15,000 to Rs 20,000 (USD 333 to 444). Farmers also need to purchase inputs including fodder and concentrated cattle feed to supplement the diet. In addition, there are costs linked to artificial insemination to ensure that the animal becomes pregnant and continues to produce milk, as well as the ongoing costs of veterinary health services. In order to encourage investment in more expensive breeds, MFIs could also offer cattle insurance. By tailoring their products to the needs of their clients, MFIs can minimise the risk of default. Moreover, by increasing the loan size to reflect the working capital requirements of their clients, MFIs will be able to increase revenues while keeping costs constant. From an MFI's perspective, 70 million milk producers across India should be an attractive market segment to target.