Micro and small-scale dairy farming systems face increasingly complex risks, along with limited access to financial resources, which constrain business development. At the national level, domestic milk production currently satisfies only approximately 22% of the total milk demand, and projections indicate a slight annual decline of approximately 0.17% between 2022 and 2026(M.O.A., 2022). This trend poses considerable challenges to food security and highlights the urgency of improving dairy sector productivity.

Food security remains a global priority and is defined as the condition in which all individuals have consistent physical and economic access to sufficient, safe, and nutritious foods to support an active and healthy life(Peng & Berry, 2019);(Pérez-Escamilla, 2024). It is commonly conceptualized using four pillars: availability, access, utilization, and stability(F.A.O., 2006). Milk plays a strategic role as a source of animal protein. Therefore, enhancing domestic milk production is essential. However, government initiatives, such as increasing cattle populations through large-scale imports, introduce additional risks that necessitate effective mitigation strategies, including collaboration with smallholder farmers and cooperatives.

Agricultural risks in dairy farming can be broadly categorized into environmental, price, supply, and quality risks(Marimin & Maghfiroh, 2010). Environmental risks are particularly critical because climate change directly affects feed availability, feed quality, livestock health, and productivity(Astuti et al., 2024);(Gauly & Ammer, 2020);(Igbal et al., 2024). Empirical studies indicate that heat stress can reduce milk yield by up to 13% and negatively affect milk composition(Zolotarov et al., 2023), with projected productivity losses reaching 30% by 2050(Hutchins et al., 2025). In addition, disease outbreaks of foot-and-mouth disease (FMD), lumpy skin disease (LSD), bovine viral diarrhea (BVD), and mastitis continue to pose serious threats to livestock systems. In Indonesia, FMD is expected to have a significant impact in 2022(Asmara et al., 2025).

Price risks arise from fluctuations in input and output markets, including feed, milk, and heifer procurement costs. High input and unstable output prices can significantly reduce farm profitability, potentially leading farmers to exit dairy production. Low milk prices can lead to the sale of dairy cattle for beef production(Gazzarin et al., 2025).

Supply risks are associated with the availability of critical inputs, such as breeding stock, feed, and veterinary services. Quality risks are related to the failure of milk products to meet market standards, affecting their acceptance by processors and cooperatives. Artificial insemination programs in Indonesia, as part of the heifer supply efforts, have been considered successful in reducing beef imports(Firman et al., 2023).

In addition to risk exposure, dairy farmers face financial and non-financial constraints in business development. Although limited access to capital remains a dominant issue(Lamkowsky et al., 2024), challenges related to feed, labor, stalls, and breeding stock are equally important. Moreover, farmers’ readiness to anticipate risks determines the sustainability of their livestock businesses(Shantharaju et al., 2024). Previous studies have examined risk perception(Roessali et al., 2022), constraints(Kallioniemi et al., 2024);(Karki et al., 2025), and investment behavior in dairy farming(Fertő et al., 2021); however, they often treat farmers as a homogeneous group and overlook differences across business scales and geographic contexts.

This study addresses this gap by investigating how micro and small-scale dairy farmers in Bogor and Bandung differ in their (1) risk perceptions, (2) development challenge priorities, and (3) intentions toward financing and insurance instruments. By incorporating segmentation based on scale and location, this study provides a more nuanced understanding of the heterogeneity in risk and financial behavior.

We tested three hypotheses: (1) Risk perceptions differ significantly across locations (Bogor vs. Bandung) and farm scales (micro vs. small). Specifically, environmental and feed risks are high in Bandung and among micro-scale farmers, price risk is low in Bandung, and quality risk is low among small-scale farmers, whereas veterinary input risks (medicines, vitamins, and vaccines) do not differ significantly owing to cooperative support. (2) The ranking of business development challenges differs significantly across locations and farm scales. Capital was the primary priority across all segments following the FMD outbreak, whereas stalls had the lowest priority. Feed-related challenges are high in Bandung, and among micro-scale farmers, labor constraints are low on micro-scale farms, and partnership-based herd expansion schemes are more workable for small-scale farmers. (3) Farmers’ intentions toward financial schemes differ significantly based on their sociodemographic and behavioral characteristics. Younger, female, and more educated farmers are more likely to prefer credit- and profit-sharing schemes. Small-scale farmers prefer affordable credit, whereas micros-cale farmers prefer profit-sharing. Farmers in Bogor prefer profit sharing, whereas those in Bandung prefer credit and insurance. High income and financial literacy increase the likelihood of choosing credit, whereas risk aversion reduces preference for external financing. Farmers with insurance intentions are more likely to adopt credit schemes.

These findings are expected to inform policymakers, cooperatives, and financial institutions in designing targeted risk management and financing programs. This study contributes to the literature by integrating risk assessment, challenge prioritization, and financing intention modeling, thereby offering new empirical evidence on the diversity of decision-making among smallholder dairy farmers in tropical regions.

This study provided three main insights. First, the risk perception of dairy farmers was dominated by feed prices, climate change, and infectious diseases. These findings are consistent with those of previous studies highlighting the vulnerability of livestock systems to environmental and market uncertainties. However, this study extends the literature by demonstrating that risk perception varies significantly across segments, particularly between locations and farm scales.

This study reinforces previous research findings that the input value composition of dairy cattle farming for the purchase of concentrate feed reached 90%, which was mostly commercial feed, whereas forage feed that can be grown independently accounted for only 7.8%(Atmakusuma et al., 2019). However, milk prices from cooperatives still cover high feed prices. Climate change, particularly during the dry season, affects animal welfare by altering feed availability, livestock health(Cahyadi et al., 2019), and milk productivity(Abbas et al., 2019). Climate change also increases the risk of disease(Ayal et al., 2017).

Risks, such as death and mastitis, are considered rare but can result in losses for farmers. Farmers generally consult or invite veterinarians assigned by cooperatives or government agencies. Milk quantity can be improved by improving feed quality. Feed difficulties can be overcome by sourcing feed from outside the region, which results in high feed prices. Collaborations with the tofu industry are also possible. Dairy heifers are generally the result of existing cattle or those obtained from fellow farmers; therefore, the risk is considered low. Farmers are also careful when adopting heifers or breeding cows from outside, especially regarding the quality and quantity of milk production. Cooperatives and livestock groups manage the availability of medicines, vaccines, and vitamins; therefore, the risk is considered to be low.

The evaluation of risk perception across the four segments revealed differences in six variables. Risk perception of feed prices was highest in the BAM segment. Meanwhile, the risk perception of five variables—difficulties in procuring heifers, procuring medicines/vitamins/vaccines, milk not absorbed/purchased, production disease (mastitis), and environmental infectious diseases—was high in the BAS segment.

Risk perception may be affected by farmer demographics, although dairy farmers’ characteristics were relatively similar to those of previous studies conducted in Central and West Java(Atmakusuma et al., 2019);(Fadillah et al., 2023);(Mukson et al., 2017). This implies that the younger generation’s intention to engage in livestock farming remains limited, as they are generally influenced by their parents and continue farming owing to limited formal job opportunities. Owing to their limited formal education, dairy farmers tend to have low financial literacy and a tendency to take risks in livestock farming.

Another finding was the difference in the sex of farmers. In Bandung, microscale farmers are dominated by women, whereas other segments are dominated by men. In an earlier study, without differentiating by scale, men dominated the population in Bandung(Atmakusuma et al., 2019). This indicates that different scales can reveal sex roles in livestock farming. The dominance of female farmers among the micro-scale farmers in Bandung is presumably related to the location of the farm, which is generally behind the house, and to inherited businesses that can be managed by daughters without a high level of formal education.

Second, capital and heifer availability were identified as primary constraints on business development. This reflects the structural limitations in smallholder dairy systems, where expansion is constrained not only by financial access but also by input availability and infrastructure. Stall expansion in Bandung is relatively complex because the existing stalls are located in residential areas. Hence, expansion is limited to existing stall capacity, which was partially affected by the FMD outbreak in 2022. In Bogor, diverse locations are associated with limited feed management, resulting in lower output than in Bandung.

Third, financing behavior is heterogeneous and influenced by both demographic and behavioral factors. The strong relation between insurance intention and financing decisions suggests that risk management awareness plays a critical role in shaping financial behavior. The finding that dairy farmers are not interested in insurance suggests that they are also not interested in external funding. This may be caused by extreme liquidity shortages, leading to the rejection of both insurance and financing (because of fear of debt and interest payments) as a common coping strategy for smallholders(Shantharaju et al., 2024). They also face challenges owing to lower initial sales(Zawadzka et al., 2021). By contrast, in a previous study, dairy farmers who have access to financial institutions can effectively manage various risks(Özsayın, 2023), and credit bundled with insurance can have a significantly higher uptake rate (33%) than that of traditional credit(Ndegwa et al., 2020). This shows that Bandung and Bogor dairy farmers face gaps in accessing financial institutions, which affect their perceptions of risk management.

Compared with previous studies that treat farmers as homogeneous, this study highlights the importance of segmentation. For instance, Bandung farmers prioritize risk mitigation (insurance), whereas Bogor farmers prioritize growth-oriented financing (profit sharing). These differences imply that the “one-size-fits-all” policy approach is ineffective.

From a managerial perspective, cooperatives play a crucial role as intermediaries, providing access to loans and grants from other parties, such as the government, NGOs, and CSR initiatives from private companies(Resti et al., 2017), as well as insurance(Acharya et al., 2024);(Geng et al., 2023);(Zhong et al., 2022). They can consolidate feed procurement to reduce costs, facilitate access to financing and insurance, and provide financial literacy programs. From a policy perspective, integrating credit with insurance products (bundling) may increase adoption rates, as suggested by previous research.

This study demonstrates that micro and small-scale dairy farmers exhibit significant heterogeneity in risk perceptions, development priorities, and financing intentions. Farmers in Bandung face high operational risks, particularly those related to feed dependence and disease exposure, whereas Bogor farmers focus more on productivity-related concerns. Despite these differences, capital and heifer availability remain the primary constraints across all segments. Financial behavior also differs. Bogor farmers are more inclined toward profit-sharing schemes, whereas Bandung farmers show a stronger interest in insurance as a risk-mitigation strategy. These findings underscore the need for segment-specific policies and financial instruments tailored to local conditions and farmers’ characteristics. Integrating risk-management tools with financing schemes can enhance the adoption and sustainability of dairy farming systems.