New Zealand Animal Evaluation Limited, 2013
Milk protein, fat and volume economic values
5th February 2013
DISCLAIMER
Every effort has been made to ensure the accuracy of the investigations, and the content and
information within this document. However NZAEL/DairyNZ expressly disclaims any and all liabilities
contingent or otherwise that may arise from the use of the information or recommendations of this
report.
Rationale
New Zealand milk processors convert raw milk into saleable commodities which are typically
valued on international markets based on world supply and demand balances for the
components of those commodities. Both the average and relative values of these milk
components and the products they make up are highly variable. Historically, long term 10year largely historical (9 years historic plus upcoming season) averages have been used to
derive economic values for milk volume, fat and protein yield traits. This is partially because
of year to year volatility in milk price and due to a reluctance of milk processors to make
medium or long term predictions. This ten year approach means that economic values do
not fluctuate greatly from year to year due to volatility. However, real trends in changes in
milk component prices are masked and economic values reflect only minimally a future
price. For this reason, we have switched to 4 years historic plus next upcoming season
forecast values to ensure values are more relevant and to maintain consistency with other
economic value calculations.
The calculations below are set out in such a way that the market value for lactose can be
included in the calculations if necessary.
Calculating the economic value
To calculate the economic value of specific milk components, we need to determine:
1. the monetary value of milk components
2. the feed cost (MJME/kg) to produce that particular component (Appendix 1)
3. the necessary reduction in stocking rate to accommodate the extra feed required
(e.g. re-scaling; Appendix 2)
New Zealand Animal Evaluation Limited, 2013
Milk component price assumptions
Table 1 describes the calculation of 5 and 10 year average values for milk solids price
(consumer price index [CPI] adjusted) and the valued component ratio (VCR). The CPI
adjustments were obtained from:
www.stats.govt.nz/browse_for_stats/economic_indicators/CPI_inflation/info-releases
and June quarter values of the SE9a index were taken. Milk solids payout values were taken
from Table 7.1 of the DairyNZ economic survey report from:.
www.dairybase.co.nz/page/pageid/2145841130/DairyNZ_Economic_Survey
Recently reported values for the 2011/2012 year and projections for the 2012/2013 year
were used, as values for these years have not yet been included in the latest DairyNZ
Dairybase statistics.
Table 1. Calculation of 5 and 10 year average values for milk solids price (CPI adjusted) and
for the VCR.
Season
VCR
Milk solids
payout ($/kg)
CPI
Real payout
($/kg)
2003/4
0.35
4.01
935
5.14
2004/5
0.36
4.44
962
5.53
2005/6
0.39
4.15
1,000
4.97
2006/7
0.39
4.13
1,020
4.85
2007/8
0.36
7.37
1,061
8.32
2008/9
0.35
5.21
1,081
5.77
2009/10
0.33
6.16
1,099
6.71
2010/11
0.39
7.36
1,157
7.62
2011/12
0.49
6.40
1,168
6.56
2012/13 (projected)
0.52
5.25
1,198
5.25
5 yr average (2008/9
to 2012/13)
10 yr average
(2003/4 to 2012/13)
0.42
6.38
0.39
6.07
Equations
Equations used which calculate economic values based on the key input parameters (milk
solids price, MSP, VCR, lactose value relative to protein, LVCR and milk volume charge,
New Zealand Animal Evaluation Limited, 2013
MVC) are as outlined below. We first outline the equations in a general manner, and then
subsequently provide example calculations with various combinations of input assumptions.
The lactose value relative to protein (LVCR) is included in the equations, but this simply
drops out of the calculation when the value of lactose is zero.
First a milk solids adjustment (MVC*) to account for the milk volume charge was calculated.
This adjustment is the volume penalty expressed per kg of milk solids (not including lactose),
i.e.
MVC* 
MVC
 P%  F % 


 100 
such that an adjusted milk solids price prior to any volume penalties is
MSP*  MSP  MVC * .
This adjusted milk solids price must equal the following
MSP*  PROT $  PMSR   FAT $  FMSR   LAC $  LMSR
 PROT $  PMSR  VCR  FMSR   LVCR  LMSR
where PROT$, FAT$ and LAC$ are the farm gate values of protein fat and lactose per kg
respectively while PMSR, FMSR and LMSR are the weights of protein, fat and lactose per kg
of milk solids (milk solids is defined as the weights of fat + protein only) respectively.
Rearrangement of the above equation gives the value of protein (PROT$) as a function of
the milk solids price, the volume component ratios, and the ratios of milk components to milk
solids in the milk as follows;
PROT $ 
MSP *

PMSR  VCR  FMSR   LVCR  LMSR
and it follows that
FAT $  VCR  PROT $
and
LAC$  LVCR  PROT $ .
New Zealand Animal Evaluation Limited, 2013
The key input assumptions that determine the economic value of milk components are:

the milk revenues per kg of milk solids sold by farmers (MSP in $ per kg MS)

the relative value of fat to protein at the farm gate (VCR which is unit less)

the relative value of lactose to protein at the farm gate (LVCR which is unit less)

the volume charge applied per litre of milk at the farm gate (MVC in $ per litre)

the profit per animal that is foregone when stocking rate has to be adjusted down due
to increased per cow feed requirements while they are on the milking platform (PPC
in $ per cow per year).
Biological coefficients used in the calculations are summarised in Table 2 below.
Table 2. Summary of biological coefficients used in the calculation of economic values for
milk components.
Description
Abbrev
Value
Average percent of milk that is protein
P%
3.82
Average percent of milk that is fat
F%
4.82
Average percent of milk that is lactose
L%
4.90
Feed energy required per kg of protein produced (MJ ME)
PME
42.35
Feed energy required per kg of fat produced (MJ ME)
FME
68.90
Feed energy required per kg of lactose produced (MJ ME)
LME
29.29
PMSR=P%/(P%+F%)
0.44
LMSR= F%/(P%+F%)
0.56
FMSR= L%/(P%+F%)
0.57
Kg of protein per kg of milk solids1
Kg of fat per kg of milk solids
1
Kg of lactose per kg of milk solids1
1
the current definition of milk solids does not include the lactose component.
Other farm assumptions also derived for other economic values include

the weighted average net revenue per cow over variable costs (NR= $276 per cow
per year) (Appendix 3)

the average MJ of ME of feed energy required per cow per year consumed while it is
on the milking platform (TME=43,489 MJ ME per cow per lactation; Appendix 4)

the average cost of feed for lactating dairy cows (FC= $ per MJ of ME utilised by
cows). For this document, an average feed price of 0.0289 $ per MJ of ME utilised
(assuming 11 MJME/kg DM) by cows has been calculated (Appendix 5).
New Zealand Animal Evaluation Limited, 2013
Example milk values
PROT $ 
MSP *
6.71

 $9.95 
PMSR  VCR  FMSR  LVCR  LMSR .674
FAT$  VCR  PROT $  0.42 x $9.95  $4.14
LAC$  LVCR  PROT $  0 .
Feed costs
Using the farm assumptions and milk component energy requirements above, it is possible
to work out the feed costs associated with production of each milk component. The method
to calculate the energetic requirements to produce a kg of fat, protein and lactose are
provided in Appendix 1. For example,
Protein feed cost
Fat feed cost
Pfeed  PME  FC  42.35  0.0289  $1.22
Ffeed  FME  FC  68.90  0.0289  $1.99
Lactose feed cost
Lfeed  LME  FC  29.29  0.0289  $0.85 .
where PME, FME and LME are the MJ of metabolisable energy required by the cow to
produce 1 kg of protein, fat and lactose respectively, while FC is the weighted average feed
cost per MJ of metabolisable energy for cows while they are lactating.
Scaling adjustment
It is also possible to work out the lost revenue from necessary reductions in stocking rates
on the milking platform to meet component energy demands (e.g. scaling adjustment).
Based on values provided above, these adjustments are calculated as follows:
Protein scaling adjustment
Fat scaling adjustment
Pscale$ 
Fscale$ 
PME
NR   42.35  276  $ - 0.27
TME
43489
FME
NR   68.90  276  $ - 0.44
TME
43489
New Zealand Animal Evaluation Limited, 2013
Lactose scaling adjustment
Lscale$ 
LME
NR   29.29  276  $ - 0.19
TME
43489
After taking into account the rescaling adjustment, and if the value of lactose becomes
embedded into the volume charge, then economic values for protein (EV_PROT), fat
(EV_FAT) and milk volume (EV_VOL; assuming nil value for lactose) are:
EV _ PROT  PROT $  Pscale$  Pfeed  $9.95 - $1.22 - $0.27  $8.46
EV _ FAT  FAT $  Fscale$  Ffeed  $4.14 - $1.99 - $0.44  $1.71
EV _ VOL  MVC  L%LAC$  Lscale$  Lfeed 
 - $0.03  .049$0 - $0.19 - $0.85
.
 $0.079
Example calculations
Table 3 gives values for each of the above equations using either 5 year or 10 year milk
price and VCR averages. The payment for lactose was taken as zero in line with the failure
of most NZ milk companies to include Lactose in their payment system.
New Zealand Animal Evaluation Limited, 2013
Table 3. Example calculations of component inputs and economic values for milk protein, fat
and volume using the equations outlined.
Value
MSP ($)
5yr averages
6.38
10yr averages
6.07
VCR
0.42
0.39
LVCR
0.00
0.00
MVC
0.03
0.03
MVC*
0.33
0.33
MSP*
6.71
6.40
PROT$
9.95
9.67
FAT$
4.14
3.80
LAC$
0.00
0.00
EV_PROT
8.46
8.18
EV_FAT
1.71
1.38
EV_VOL
-0.079
-0.079
Table 4 gives economic values for some alternative time series scenarios.
Table 4. Economic values for protein, fat and milk volume for a range of different scenarios
and compared with the existing BW values.
Scenario
EV_PROT
EV_FAT
EV_VOL
Current NBO
8.685
1.92
-0.094
5yr average – base (recommended values)
8.46
1.71
-0.079
10yr average base
8.18
1.38
-0.079
Additional penalty for volume to account for clinical mastitis
Because there is a known genetic relationship between higher milk yield and clinical mastitis,
and because no estimated breeding values currently exist for clinical mastitis, a further
penalty to milk volume has been added. Thus, the economic value of milk volume changes
from -$0.079 to become
-$0.079 + 0.00002618 x -$86.32 = -$0.081
The 0.00002618 is the genetic regression of CM on Milk volume (this is discussed in more
detail later in the derivation of the economic value of Somatic Cell Count, and -$86.32 is the
economic value of CM.
New Zealand Animal Evaluation Limited, 2013
Appendix 1. Energy costs of milk components
Milk fat energy requirement
MJME/kg milk fat
68.90
Milk protein energy requirement
MJME/kg milk protein
42.35
Milk lactose energy requirement
MJME/kg milk lactose
29.29
These values used Mcal net energy requirements for fat, protein and lactose of 9.29, 5.71 and
3.95 Mcal/kg respectively, multiplying this by 4.18 MJME/Mcal and dividing by 59% (efficiency of
conversion from net to metabolisable energy. The energy requirements associated with each milk
component were further increased by 10% mirroring a maintenance loading for lactation
embedded in the DairyNZ model calculations. The theoretical values for calorific efficiency and
adopted previously (81%, 89% and 77% respectively) (Mertens and Dado, 1993) only account for
heat produced and not other forms of inefficiency required to produce the milk component.
Assuming 11 MJME/kg DM, the efficiency of converting net energy to metabolisable energy for
milk (kl) is 62% (Nicol & Brookes 2007).
The New Zealand literature does not give specific component values. A recent Waghorn paper
reports ME for 1kg of milk solids has increased from 68 (Holmes et al. 2002) to 77 MJ ME (Nicol &
Brookes 2007). Calculating values through using the old BW assumptions based on Mertens and
Dado 1993 gives a value of approximately 60 MJ of ME per kg of milk solids. Our methodology
gives a value of 74 MJ of ME.
Specific component energy requiremet values (MJME/kg).
Mertens and
Component
Current model
Dado (1993)1
Protein
42.35
31.8
Fat
68.90
56.2
Lactose
29.29
25.0
1
Journal of Dairy Science
New Zealand Animal Evaluation Limited, 2013
Appendix 2. Rescaling to a fixed milking platform
Historic approach
In the historic NBO model developed in 1995, it was assumed that all milking cows, dry cows and
heifer replacements were managed on the milking platform. In reality now, the vast majority of
heifer replacements NZ wide and dry cows in the South Island are grazed off the milking platform.
Consequently, to accommodate trait changes that resulted in a higher feed requirement per cow,
there was a larger than practical reduction in stocking rate. The feed requirements of heifer
replacements and dry cows had to be accounted for. Also embedded in the historic NBO model
was a constant feed cost for all stock classes including dry cows and replacement heifers. This
feed cost was also the same irrespective of the time of year.
New approach
In the current model, we have made a number of changes to the underlying assumptions to align
with the industry norm:
1. All heifer replacements are grazed off
2. One half of all dry cows are grazed off the milking platform for 60 days.
3. We have adopted an opportunity cost to the value of feed using the seasonal values
adopted in the Forage Value Index for the milking platform, and using dairy support values
for dry cows and heifers grazed off the milking platform (see Appendix 5 below for details
on feed price assumptions) represented as a weighted average.
The first two points mean that when representing a trait change which increases feed requirements
equally through the year (e.g. the maintenance component of cow liveweight), the accompanying
reduction in stocking rate is not as much as previously used in the historical NBO formulation. The
replacement heifers (22 to 24 months) and half of the dry cows feed requirements for 60 days are
now not accommodated in the milking platform stocking rate adjustment. Explicit costs are
assigned to the dry cow feed requirements when grazed off, based on FVI index values for the
North Island, and based on dairy support grazing rates in the South Island. The cost of grazing
heifer replacements is based on typical grazing off costs (discussed in more detail in the longevity
economic value model description). The last point balances the previous two points in that a cow
gets more penalised through high opportunity costs of feed she eats which could have otherwise
been used to support milk production in another cow.
New Zealand Animal Evaluation Limited, 2013
Under this same increase in feed requirements scenario, we account for the lost revenue from the
reduced stocking rate, but also take account for the fact that there will be many savings in per cow
costs as well.
i.e. a 10% reduction in cows leads to a (note that cost categories in bold below correspond directly
to cost categories in DairyNZ economic summary statistics)
8% reduction in Labour costs (including for wages of management)
5% reduction in Freight and General 8% reduction in Animal Health Costs
10% reduction in Breeding and Herd Testing Costs
8% reduction in Electricity Costs
8% reduction in Farm Dairy Costs
Many of the above assumptions about these other cost savings are consistent with the historical
BW calculation and endorsed by the Standing Advisory Committee of NZAEL. Another important
change in the new approach is that wages of management are included as part of labour costs.
Wages of management as a proportion of per cow costs have reduced significantly over the years
as farms have got bigger and use more hired labour. However, they are still significant (i.e. 40 to
50% in the North Island and 20 to 30% in the South Island) and must be included.
Mathematical formulation
Under the assumption that feed resources are fixed on the milking platform during milking, a trait
change in a single animal which changes feed demand will result in a change to the number of
predominantly lactating cows that can be carried.
The change in profit per farm with a change in a trait in a single animal, under the assumption that
feed resources on the milking platform are fixed, can be calculated as:
d  farm
d
where

d  animal d

 NR animal,
d
d
animal is the profit per animal which is a function of each genetic trait T of interest,
NR animal is the average net return per animal lost as the stocking rate is reduced, and 
number of cows on the milking platform.
is the
New Zealand Animal Evaluation Limited, 2013
The first part of the equation above is the unscaled economic value, and the second part is the
adjustment to the unscaled economic value to account for the change in net returns on the farm
due to the reduction in stocking rate required to meet a constrained total amount of feed on the
milking platform.
The fixed milking platform feed per farm ( MPFfarm ) can be calculated as:
MPF farm  MPFanimal  
where
,
MPFanimal is the milking platform feed per animal prior to any genetic trait change. Under
this assumption it holds that:
d

d
where
 d MPFanimal
d
MPFanimal
d MPFanimal
is the change in feed required as a trait T increases in one animal.
d
For example, an increase of 1kg of fat increases
MPFanimal by X MJME per lactation, with a
MPFanimal of Y. Therefore there must be proportionately X/Y less cows on the milking platform.
Example calculation - rescaling the economic value of milk fat yield.
The unscaled economic value of milk fat is approximately $2.15 per kg, depending on current
assumptions elsewhere in the economic model. The additional mega joules of metabolisable
energy (MJME) associated with a 1 kg higher fat yield is assumed to be 68.90, all of which must be
consumed on the milking platform. The total average MJ of ME consumed on the milking platform
per cow is calculated to be 43,489 MJ of ME (Appendix 4). Therefore, the proportional reduction in
the stocking rate per cow that increases its fat yield by 1 kg is 68.90/43,489=0.00158. If the
average net return per animal is $276 (Appendix 3), then the rescaling adjustment is -0.00158 x
$276 = -$-0.44, and the rescaled economic value would be $2.15 - $0.44 = $1.71.
New Zealand Animal Evaluation Limited, 2013
Appendix 3. Calculation of net returns per animal
A key component of the above formulation is the calculation of net returns per animal. This
calculation uses DairyNZ Economic Service Owner Operator profitability and expenses (an
average of the last 4 years values plus next year's forecast). An example of the calculation within
the new NBO model is provided in Table 5. We start with net revenues per cow (Owner
Operators), which are implicitly lost when a reduction in stocking rate is incurred. From this, per
cow costs are deducted based on assumed proportions of total per cow costs being saved with a
reduction in stocking rate. For example, all the breeding and herd testing costs associated with an
individual cow are saved with a reduction in stocking rate. However, there are fixed costs
associated with a farm dairy (e.g. cleaning products) that cannot be reduced with a reduction in
cow numbers. Therefore, only 80% of the costs for a farm dairy can be attributed on a per cow
basis.
Table 5. Example calculation of net returns per animal based on milk and beef revenues after
deduction of per cow costs including feed costs and market value of replacement heifers.
Parameter
2008
2009
2010
2011
2012 F
Total revenues per cow (milk plus beef sales)
1
($/cow)
1,893
2,233
2,708
2,664
2,130
284
278
276
275
276
0.549
0.595
0.609
0.625
0.628
9
8
9
9
9
57
55
66
62
60
42
38
46
45
44
Nominal per cow costs (excluding feed and replacements)
80% of labour (adjusted for wages of management)
($/cow)1
The proportion of labour from wages 1
50% of Freight and General ($/cow)
80% of animal health ($/cow)
1
1
100% of breeding and herd testing ($/cow)
1
1
26
28
29
30
31
80% of farm dairy ($/cow)1
17
16
17
18
17
Total var. costs excluding replacements and
feed ($/cow)
434
424
442
439
437
Nominal total revenue per cow after adjustment for
per cow costs (excluding feed and replacements)
($/cow)
1,459
1,809
2,266
2,225
1,693
Real total revenue per cow after adjustment for per
cow costs (CPI adjusted) ($/cow)
1,607
1,955
2,408
2,247
1,693
Average over 5 years to real total revenue
1,982
Average per cow opportunity costs of feed based
on forage value index feed prices ($/cow)
1,400
80% of electricity ($/cow)
Average cost of replacements
305
Average net revenues across the year ($/cow)
$276
1
Example values based on DairyNZ farm economic statistics for the whole of New Zealand.
New Zealand Animal Evaluation Limited, 2013
Appendix 4. Example industry summary statistics
Table 6: Description of the average NZ cow as determined by model assumptions and
inputs
Parameter
Units
Value
Annual Production
Milk Volume
Milk Fat
Milk Protein
Milk Lactose
Milk Solids
Milk Fat
Milk Protein
Milk Lactose
Milk Solids
L/cow
kg/cow
kg/cow
kg/cow
kg/cow
%
%
%
%
3,764
180
143
184
323
4.82
3.82
4.90
8.68
Cow live weight
Proportion of replacements in the herd
kgLW
%
453
0.21
Annual energy requirements
Total lactation requirements
Total requirements on milk platform
Total dry period requirements
Total period requirements
Total replacement heifer requirements
Total replacement heifer requirements per milking cow
Total requirements per lactating cow
MJME
MJME
MJME
MJME
MJME
MJME
MJME
40,554
43,489
7,968
48,522
32,823
6,996
55,517
New Zealand Animal Evaluation Limited, 2013
Appendix 5. Overview of feed price assumptions
Forage value index dry matter values
The NBO model described here makes substantial use of economic weights derived for the
DairyNZ Forage Value Index (FVI). These weights are used in the NBO calculations to
reflect the opportunity cost of feed, and in particular to account for differences in the cost of
feed at different times of the year. They are the basis for all of the traits which involve feed
costs. The FVI economic weights are expressed as $ per kg of dry matter production. They
apply to 5 distinct seasons, namely, winter, early spring, late spring, summer and autumn.
Separate regional assumptions and model constructions were used for average farms in the
Upper North Island, Lower North Island, Upper South Island and Lower South Island.
The values currently used in the model are summarised in Table 7. These values are the
weighted averages of values computed using the FVI model for the past 4 seasons, plus
projected values for the 2012/2013 season.
Table 7. Feed costs price assumptions ($/kg DM) as calculated for the Forage Value Index.
Feed costs by
season
Winter
Early Spring
Late Spring
Summer
Autumn
Upper North
Island
0.29
0.46
0.18
0.38
0.39
Lower North
Island
0.37
0.45
0.14
0.32
0.30
Upper South
Island
0.43
0.40
0.29
0.15
0.27
Lower South
Island
0.38
0.43
0.21
0.09
0.24
NZ Weighted
Average
0.35
0.44
0.20
0.28
0.32
Source: http://www.dairynzfvi.co.nz/fvi-understanding/economic-values; Updated on 10th
September 2012 based on information provided by Jeremy Bryant. NZ weighted average
based on number of cows per region. Description of approach described in (Chapman et al.
20121).
Dry stock costs off the milking platform
The opportunity costs of feed as described above for the FVI result in grazing costs for
heifers that considerably exceed the cost of contract grazing to rear replacement heifers off
the milking platform. For this reason, opportunity costs of feed on dairy support properties
were derived, so that the true costs of grazing to rear heifers to different mature live weights
could be modelled. In the South Island, a substantial proportion of dry cows are also
1
Economic values for evaluating pasture plant traits (2012). Paper for the New Zealand Grasslands
Association. D.F. Chapman, J.R. Bryant, W.H. McMillan, E.N. Khaembah.
New Zealand Animal Evaluation Limited, 2013
managed off the milking platform during winter, as this releases extra feed in autumn and
early spring that can be more profitably used for milking cows.
Spring feed opportunity costs - dairy support
The opportunity cost of spring feed consumption is assumed to be low because most dairy
support farms have a surplus of feed available through the high growth spring period.
However, some spring feed can be sold as standing silage. If we assume that 20% of spring
feed on a dairy support property can be sold at a standing price of $180 per tonne of dry
matter, the opportunity cost of spring feed is 0.2 x $180/1000=$0.036 per kg DM.
Summer/autumn feed opportunity cost - dairy support
The opportunity cost of summer and autumn feed used for dairy support is based on
alternative revenues that could be obtained by finishing store lambs. If an extra kg of lamb
carcase weight is worth $4.40, and 240 MJME is required to grow an extra kg of live weight,
then at pasture metabolisable energy concentration of of 10.8 MJ/kg DM, the opportunity
cost of summer and autumn feed is $4.40 x 10.8 /240 = $0.198 per kg of DM.
Winter feed opportunity cost - dairy support
The opportunity cost of winter feed assumes 80% of winter feed is supplied by crop and the
remaining 20% is silage. The cost of growing winter feed crops is assumed to be 15 cents
per kg DM, but a calculation of an additional 10 cents per kg of dry matter to account for the
value of lost pasture production during the crop rotation has been added on. Thus, the cost
of crop available is $0.25 per kg of dry matter. Silage at $180 per tonne to buy standing, and
at $240 per tonne to harvest, store and feed equates to $4.20 per kg of dry matter.
Assuming 20% silage and 80% crop, both with utilisation rates of 75%, results in an
opportunity cost of winter feed of $0.38 per kg of DM.