Value-Added Diversification in Small Dairy Farms: Economic Efficiency and Strategic Investment

This research was conducted on small farms in Republika Srpska, an entity of Bosnia and Herzegovina. Data were collected through direct interviews on five farms, each with 8–15 dairy cows, which at some point diversified their production from selling raw milk to processing and selling fresh cheese. Due to low productivity and limited economies of scale, calculated indicators such as net present value, internal rate of return, and payback period are insufficient to consider traditional milk production economically justified. However, further analysis using Monte Carlo simulations and the real options method demonstrated that diversifying production into cheese processing is economically feasible, as confirmed by the strategic net present value calculated using Black–Scholes and binomial approaches. The results indicate that small, extensive family farms should focus on higher levels of product finalization. Although their production volumes are limited and they are not cost-competitive in raw milk markets, they gain a competitive advantage by adding value through their own labor and selling products via short supply chains. Diversification enables these farms to improve profitability, achieve financial stability, and strengthen market positioning, demonstrating that value addition is essential for the sustainability of small-scale dairy enterprises.