Economic feasibility for the development of agribusiness: milk production or minas frescal cheese manufacturing

Abstract

The dairy industry in Brazil has a market structure similar to oligopsony, characterized by the existence of few buyers of a good produced by many sellers. The perishable character of fresh milk further reduces the bargaining power of sellers, whose operating profit is pressured by significant price fluctuations. Considering the existence of economies of scale in the production costs of dairy farming, small and medium producers have lower profit margins and, consequently, are the most vulnerable in this market structure. Cheese making is a technique widely known by the rural community and capable of adding value to milk production, suggesting that it is a more promising alternative to the business. In order to verify this hypothesis, the present study investigates the economic returns involved between two possible destinations of raw milk. The objective of the research is to support investment decision-making by small and medium-sized milk producers. The work methodology was segmented into four stages: regional data collection; operating cash flow projection; calculation of financial and economic indicators; and application of the Analytic Hierarchy Process method for selecting the investment project. It was found that cheese production would provide economic return to medium-sized cattle ranchers and economic loss to small producers. It was concluded that milk production would be the best investment alternative for both.