Evidences on potential of milk consumption in preventing malnourishment vis-à-vis market-oriented/intensifying smallholder dairy-producing areas are scant. Hence, this study explored the consumption habits of fresh bovine milk in the dairy-producing households. Data were collected from a survey of 200 dairy households and key informant interviews. The results revealed that the amount of self-consumed fresh milk per farm and day by producer families varied from 0.5 to 5 L per day. The majority consumed and traded milk at the same time. The practice of treating milk before consumption differed significantly across production systems. Eighty-four percent of the dairy producers boiled milk before consumption, and 8.5% of the respondents did not consume fresh but rather fermented/sour milk (ergo) as most of them had symptoms of lactose intolerance. Based on United States Department of Agriculture recommendations, the daily requirement is 10–15 cups if on average 5 of the family members are drinking milk. Hence, there was a lack of 1.40–2.85 L of milk, which is insufficient to satisfy the nutrition requirement from dairy foods. However, there are ample experiences of dairy farming, local availability, milk production, and culture of milk consumption. There is scope to improve nutrition through consuming sufficient quantities of milk by the milk-producing households and balancing the staple foods (teff and wheat) in the area. Improving milk productivity will increase the levels of milk consumption, which in turn would have great potential as a cost-effective and sustainable household food production strategy for malnourished children.