Introduction
The milk pricing system for dairy farmers in South Africa was previously controlled by the Dairy Board. Basically two pricing systems were used, i.e. one for fresh or liquid milk consumtion and another for industrial or processed milk. A higher price was usually paid for fresh milk. In 1983, the Dairy Board adopted the slogan "Milk is Milk" in an effort to pay all farmers a uniform price for their milk. Currently, milk prices are determined by the milk processors themselves resulting in various milk pricing structures.
Payment for fresh milk is based on volume (liters) containing minimum levels of fat and protein percentages. The payment for milk for processing is based on the amount (kg) of fat and protein produced. The payment for fat and protein usually varies with a higher price for protein. Sometimes an additional premium is paid for protein to stimulate a higher protein production.
Most milk processors also provide fresh milk to the market. Notwithstanding all the efforts to change, there are still real price disparities between fresh and industrial milk. Farmers still compare milk prices directly regardless of payment system. Individual milk prices will always differ because of different fat and protein percentages in milk and the amount of milk produced.
Fat and protein yield
Most dairy processors have found that the fat and protein percentage of the milk that is collected from farmers on a daily basis is lower than what it was 15 to 20 years ago. Various factors may have contributed to this, but it is probably because of the antagonistic relationship between milk volume and fat and protein percentages. This reduction in fat and protein percentages presents a problem for dairy processors as the production cost of most milk products is increased because of the lower contents. The increase in production costs is related to the higher transport and handling costs of milk with lower fat and protein percentages as more liters of milk are required to produce specific amounts of the same product. Fat and protein yields are determined by both the volume of milk produced and the percentage of fat and protein (Table 1).
Table 1. The effect of the volume of milk and the fat or protein percentages on fat or protein yield (kg fat/protein per cow per day)
Fat or protein yields are increased by either increasing the volume of milk produced or the fat and protein percentage in the milk or by changing both the amount and contents of milk. Because the payment for milk is based on the amount of fat and protein produced, the same basic price is being paid for milk regardless whether the milk has a high or low fat and protein percentage. This causes contrasting interests for farmers and dairy processors.
Dairy farmers tend to increase the volume of milk while dairy processors on the other hand, need milk containing higher fat and protein percentages to reduce the production cost of dairy products. Farmers increase the volume of milk through better feeding and genetics by increasing the average milk yield of cows in the herd or by milking a larger number of cows.
The problem for processors is that less cheese is made per batch from milk containing less solids per volume. The size of milk vats in dairy plants is fixed and the amount of cheese that is produced from each vat depends mainly on the fat and protein percentage in the milk. The predicted Cheddar cheese production from a 100 kg of milk decreases from 13.7 to 9.5 kg when the fat and protein percentage of milk decreases from 5.50 and 4.20% to 3.50 and 3.00%, respectively. Because of the lower fat percentage, some 0.35 kg extra fat that would have been produced for butter, is lost.
Prices for milk to be used for processing should encourage farmers to supply milk that contains high fat and protein percentages. The volume of milk should also be considered as that affects transport cost. The volume could be increased by milking more cows in a herd. Dairy farmers will only adopt a different approach to milk components and yield if there is a financial incentive to provide the type of milk that processors require.
Penalizing volume
Some countries have a milk pricing system based on prices paid per kg fat and protein with a penalty (a negative value) on the volume of milk produced. This is done presumably in an effort to encourage the production of milk containing more milk solids. It is, however, doubtful whether this practice will produce the desired results. In Table 2 the effect of a penalty on milk volume on the income per lactation for Holstein cows is shown.
Table 2 The effect of a negative price on the volume of milk produced on the income per lactation of cows in a Holstein herd
From 1983/84 to 1997/98 the milk production of cows in this herd increased by 64%. As expected, the fat and protein production also increased, although at a smaller margin. This is because the fat and protein percentages of the milk were reduced at the same time, i.e. from 3.70 to 3.50% for fat and 3.36 to 3.22% for protein. The ratio of fat to protein yield did not change and was 1:0.91 in 1983/84 and 1:0.92 in 1997/98.
The problem for the industry is that the income per lactation of cows in this herd increased even though milk with lower fat and protein percentages was produced. While the herd’s income had increased, the dairy processor received milk of a lower quality in terms of fat and protein percentage. This would increase the cost of producing most dairy products. Although a penalty of 5c/litre on the volume of milk reduced income, the negative effect was small when compared to the improvement in milk yield. The income per lactation was reduced by only 5% because of the lower fat and protein percentages. This small reduction in farm income in relation to the improvement in milk yield would not stimulate the production of milk containing more solids.
Ways to increase the milk price
Milk pricing structures vary between different milk processors. The current milk pricing structure at Elsenburg is based on the amount of fat and protein produced with a bonus system to stimulate protein production.
Deductions are made for transport cost based on the distance between the farm and the processing plant (starting at 30 km) and also milk quality based on somatic cell count and total plate count. According to this milk pricing structure, various options could be considered to increase the price of milk above a standard price (Table 3).
This includes options such as milking more cows (Option 1), increasing the milk yield per cow (Option 2), increasing the protein percentage of the milk (Option 3) or milking an even larger number of cows (Option 4).
Table 3. The effect of different options on the milk price realised for a Jersey herd
By milking 10 cows, the price of milk for this herd is 200 c/liter. By increasing the number of cows in the herd to 82, the price of milk increases by 15 c/liter. It is increased by another 2 c/liter when the average milk yield in the herd increases from 15 to 19.5 liters/cow/day. The same response is obtained when the protein content of the milk increases from 3.80 to 4.94%. Increasing the average milk yield or protein percentage of the milk in a herd to such an extent over a short period of time, would imply a herd of high genetic merit that was previously grossly underfed.
As the standard production level used in the example is typical for Jersey cows; both options 2 and 3 would only be achieved over a substantial period of time through improved genetic and management means. The results are also small, only a 2 c/liter increase on the current milk price. Increasing the number of cows in the herd to 460 resulted in another 15 c/liter increase in the protein bonus.
Based on this milk pricing structure, the best way to improve the milk price would be to increase the volume of milk produced by milking more cows. For different milk pricing structures different options need to be considered. This makes recommendations regarding sire selection and the correct feeding and management programme to receive the best milk price very difficult.
Increasing the volume of milk
The variation in milk yield between cows is large and high milk yield levels are possible. Increasing the milk yield of cows is usually easy because it mainly involves feeding more and higher quality feeds. The amount of milk dairy cows produce is dependant on their total energy intake. The amount and quality of the forages (pasture, hay or silage) and supplementary concentrates determine the total energy intake of cows. The condition of the cows at calving also affects the amount of milk cows produce.
Increasing the milk composition of milk
It is difficult to increase the fat and protein percentages of milk by feeding as it involves contrasting feeding regimes. To increase the protein percentage in the milk, more energy in the diet is needed. This is usually supplied by feeding more or a higher quality concentrate mixture. By increasing the amount of concentrates in the diet, cows may start to ruminate less because of a shortage of fibre. This reduces the saliva production of cows resulting in a more acidic rumen. This reduces the number of acetic acid producing bacteria in the rumen and that results in milk having a lower fat percentage. Artificial buffers must then be included in the diet to protect the rumen against high acidity levels and a drop in fat percentage.
The total diet of dairy cows should always contain a minimum roughage level. For higher fat percentages more roughages or artificial buffers must be included in the diet to keep the acidity level in the rumen low. This effectively puts a limit on the maximum amount of concentrates in the diet. For cows on pasture, additional roughages like hay or straw are sometimes fed in an effort to increase rumination and to maintain or improve the fat percentage in the milk. This, however, could lead to a lower total feed and energy intake with a reduction in the milk yield and protein percentage. This could ultimately result in a reduced milk price and therefore milk income.
According to the milk production results in a study where straw was fed additionally to cows on pasture, the net improvement in the milk price was small (less than 1 c/litre) without regarding the extra cost of feeding the straw.
Sire selection
Based on heritability estimates, the genetic effect on milk production and milk composition in dairy herds is medium to high. The genetic relationship between milk volume and fat or protein yields is high and positive, while the relationships between volume and percentages are negative.
Emphazing the volume of milk could result in milk containing less solids. This is to the disadvantage of dairy processors. With a high emphasis on fat and protein percentages, the volume of milk could be reduced to the disadvantage of farm income.
A payment system based on prices paid per kg fat and protein provides little financial incentive to produce high solids milk. Sires are often labelled as high volume or high component bulls. Ranking sires according to their genetic income (based on a payment system for kg fat and protein), it is often found that bulls with high components rank lower than high volume bulls. This is because of lower fat and protein yields.
Changing the genetic status of dairy cows in terms of milk volume and components is possible although difficult. This is dependant on a long term strategy and different sire selection criteria are needed both on farm and by AI companies.
Conclusions
The milk pricing structure of dairy processors affects the feeding and breeding programmes in dairy herds. A milk pricing structure based on fat and protein yields results in an increase in the volume of milk. This is in contrast to the requirement of dairy processors who need milk of high fat and protein percentages. A penalty on milk volume does not provide enough financial incentive to increase the fat and protein percentages in milk. The financial implications of feeding supplementary roughages or concentrates to change the fat or protein percentage in milk should be considered holistically. There is little incentive to feed straw to cows on pasture to improve the fat percentage in the milk if that results in less milk and a lower protein percentage and a reduction in the milk income.
Milk pricing structures of dairy processors should include the volume of milk produced and the percentages of fat and protein in the milk. A sliding scale should be used emphazing higher fat and protein percentages. This will provide the financial incentive to farmers to adopt appropriate feeding, breeding and management strategies to supply a product that accords with the requirements of dairy processors.
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