The Value of Genetic Improvement Evaluated Using a Whole of Enterprise Market Model

Abstract

The net return from milk to the producers is defined as the aggregate market income from dairy products, after deducting all processing and marketing costs. The way to distribute this net return is through the payment system, which is usually based on multiple components, mainly with a reward for fat and protein and, in the case of the New Zealand dairy industry, a penalty for milk volume. Traditionally, the value of genetic improvement is evaluated using selection index theory assuming that there is an unlimited market where all dairy products can be sold in unlimited amounts at a fixed price and therefore economic values for fat and protein are assumed to be independent of demand. The objective of this study was to estimate the value of continuous genetic improvement evaluated using a model encompassing all the dairy producers in the industry where prices of the dairy products were determined by product specific supply-demand curves. Over 10 years of genetic improvement, the present value of the benefit (10% discount rate) was estimated to be $123,000 per farm. The corresponding benefit when the markets were assumed to have fixed commodity prices was $183,000 per farm. The model revealed that systematic genetic gains had a finite duration during which incremental benefits progressively declined and would be exhausted eventually.