183

Bulgarian Journal of Agricultural Science, 23 (No 2) 2017, 183–188

Agricultural Academy

ECONOMICS OF DUAL-PURPOSE DAIRY CATTLE UNDER VARIOUS MILK PRICING

SYSTEMS

MONIKA MICHALIČKOVÁ*; ZUZANA KRUPOVÁ; EMIL KRUPA

Institute of Animal Science, Department of Genetics and Breeding of Farm Animals, 104 00 Prague 10, Czech
Republic

Abstract

Michaličková, M., Z. Krupová and E. Krupa, 2017. Economics of dual-purpose dairy cattle under various milk
pricing systems. Bulg. J. Agric. Sci., 23 (2): 183–188

The impact of various pricing systems on the profitability of Slovak Simmental dairy cattle was evaluated using a bio-
economic model. Pricing systems represented the most widespread variants of the contracts of farmers and dairies. Direct
subsidies related to dairy herd were included when calculating the profit. The evaluated production system operated with loss
per cow and year (455 €), which ranged from 326 to 589 € when delivering the same milk quality to various dairies. Orienta-
tion of dairy towards products with higher added value was found to be a comparative advantage. In contrast, high penalties
for nonstandard milk resulting in a lower average milk price were competitive disadvantages. Moreover, the content of somatic
cells was highly important in terms of the health security of milk production.

Key words: dairy cattle, bio-economic model, economics, pricing system

Introduction and overall costs per cows increased (due to higher prices
of inputs). Furthermore, the abolition of milk quotas in 2015
Profitability of animal husbandry is strongly influenced has created stronger pressure on milk production throughout
by economics and by the biological specifics of produc- Europe. Currently, the profitability of dairy farms is more de-
tion. A bio-economic model is a methodology that provides pendent on the diversification of production. Considering the
a comprehensive evaluation of biological (production and current unstable economic situation in animal production,
genetic variables) and economic aspects of the animal farm dual-purpose breeds are useful for reducing the risk of dairy
system (Wolf et al., 2013). In addition to economic and bio- farms. At present, the Slovak Simmental cattle, the most
logical factors, supply chains (including also the pricing sys- prevalent dual-purpose cattle, amounts to 163 721 animals
tem) generally play an important role in the economics of produced/milked, with 5717 kg of milk per 305 d lactation
dairy production (Kahi and Nitter, 2004). In Slovakia, the on average (4% fat and 3.4% protein content in kg of milk).
pricing system (milk price) in most dairies is based on milk The aim of this study was to provide a comprehensive
volume and standards for fat and protein contents, below or evaluation of the influence of various pricing systems (de-
above which bonuses or penalties are added to or subtracted scribed in “Material and Methods” section in details) on the
from the base milk price. As you will see in the next parts of profitability of the dairy farm system of Slovak Simmen-
paper, the milk pricing system varies largely among farms tal cattle using a bio-economic model. To the authors’ best
and dairies (“Material and Methods” section). knowledge, this type of interdisciplinary analysis (based on
In the last ten years, the milk sector has undergone two real dairy contracts and using a bio-economic model) will be
large changes. After 2009, the average milk price dropped, the first applied to local conditions.

*Corresponding author: [email protected]

184 Monika Michaličková*; Zuzana Krupová; Emil Krupa

Materials and Methods study. The farm system was treated as self-reproducing, with
the rearing of breeding animals for their own replacement.
Pricing systems A classical indoor farming system with the export of surplus
In all of the evaluated dairies, the base milk price was male progeny and selling of surplus pregnant breeding heif-
paid per kg of milk according to fat and protein content and ers was assumed as a marketing strategy. The main economic
the proportion of milk over the individual quality classes of and production inputs of dairy population were carried out
the somatic cell count (SCC). However, individual thresh- using data from a total of 12 cattle farms (2723 cows; ba-
old value/s and price corrections (bonuses and reductions) sic production and economic evidence of farms) in Slovakia
for the milk components (fat and protein content) and for during the period 2011 to 2013 (methodology described e. g.
SCC varied among the evaluated pricing systems. Therefore, in Michaličková et al., 2014). Production data were obtained
the average milk price remained not constant over pricing also from previous studies dealing with the local dairy cattle
systems. For example, the pricing system B was primarily population (Krupa et al., 2005; Krupová et al., 2016) and
focused on products with higher added value, which is re- from performance testing provided by the Breeding Services
flected in the higher basic milk price and bonuses paid per of the Slovak Republic. The trait mean values and genetic
milk components. The systems representing the most wide- standard deviations are described in details in Table 2. The
spread variants of pricing systems in Slovak dairy farms stationary state of the herd structure was derived using the
were gradually applied to the bio-economic model while Markov chain procedure (Wolfová et al., 2007).
other inputs for Slovak Simmental breed remained constant.
Direct impact of given pricing system to the economic result Table 2
per cow and year was quantified. A detailed description of Means and genetic standard deviations (GSD) for basic
the evaluated pricing systems with specification of penalties characteristics of Slovak Simmental population
and bonuses (A-C) is given in Table 1. Trait (unit) Mean GSD
Milk yield (kg per cow and lactation) 5717 368
Farm System Fat content (%) 4 0.21
Current level of production and economic data for dairy
Protein content (%) 3.4 0.09
population of the Slovak Simmental cattle was applied in the
1
SCS (score) 4.72 0.085
Table 1 Calving performance (score) 1.26 0.05
Input parameters for calculating revenue from milk and 2
description of pricing systems Losses of calves at calving (%) 8.3 3.1
3
Variable (unit) Pricing system Losses of calves till weaning (%) 6.8 1
A1 B2 C3 Conception rate of cows (%) 91 1.5
Basic milk price (€ cents per kg) 28.07 31.00 26.48 Conception rate of heifers (%) 93 1.5
Bonus for milk protein percentage (€ cents 0.8 1.2 0.9
per % of protein) Productive lifetime of cows (years) 3.14 0.3
Bonus for milk fat percentage (€ cents per 0.7 1.0 0.6 Source: Krupa et al. (2005), Krupová et al. (2009)
% of fat) 1
Somatic cell score calculated as log2 (SCC/100,000)+3. 2Losses of calves
Price reduction for nonstandard milk (€ cents 4.6 6.3 11.7 at calving include aborts, calves born dead, and calves that died within 48 h
per kg of milk) after calving.3Losses of calves to weaning expressed as proportion of calves
Average milk price (€ cents per kg of milk)4 29.40 31.80 26.70 born alive
1
The basic milk price – SCC ≤ 400,000 cells per mL, and the fat and protein
contents ≤ 3.6 and 3.2 %, respectively. Reduction for milk with SCC ≤
400 000 cells per mL and for fat and for protein content ≤ 3.6% and 3.2%, Profit function
respectively. 2Basic milk price – SCC ranges from 300 000 to 400 000 cells Profit was the criterion of economic efficiency for the
per mL, and fat and protein contents range from 4.2 to 3.1 % and from 3.6 modelled farm system (Wolf et al., 2013):
to 2.8 %, respectively. Reduction for milk with SCC ≤ 400,000 cells per mL
and for fat and for protein content ≤ 3.1 % and 2.8 %, respectively. 3Basic profit = rev´ × NDE(rev) – cost´ × NDE(cost), (1)
milk price – SCC ≤ 400 000 cells per mL and fat and protein content range where rev´ and cost´ are the row vectors of revenue and costs
from 3.6 to 3.8 % and ≤ 2.8 %, respectively. Reduction for milk with SCC ≤
400 000 cells per mL and for fat and for protein contents ≤ 3.3 % and 2.8 %,
per animal, respectively, the elements of which are revi and cos-
respectively. 4Price per kg of milk of given fat (4 %) and protein (3.4 %) con- ti, with i being the category of animals. NDE(rev) and NDE(cost)
tents and given somatic cell count (472 300 cells per mL) in the population are the column vectors of the number of discounted expressions
Economics of Dual-Purpose Dairy Cattle under Various Milk Pricing Systems 185

connected with revenues and costs, respectively, the element of Costs were calculated separately for feeding, housing,
which are NDEi(rev)and NDEi(cost). All revenues and costs occur- breeding and health. All other costs were accounted for as
ring in the herd during a year and in the life of progeny born a fixed cost per animal category per day (Table 4). Hous-
in the herd were discounted to the date of birth of the progeny. ing costs were those for bedding, i.e., costs for straw minus
An annual discount rate of 1.0 % (estimated as the difference revenues for manure. Breeding cost were those associated
between the average annual investment rate and inflation rate in with artificial insemination and included the price of semen,
Slovakia during the evaluated period) was used. labour and services per conception. Health costs included
Revenues were calculated from milk, breeding heifers, veterinary costs per animal, dystocia cost per calving and
slaughtered cows and manure. Revenue from milk was a the cost of removing and rendering dead animals (Wolfová
function of quantity, fat and protein content and SCC. To et al., 2007).
calculate these values, the pricing system, the basic price, the
milk yield and proportion of cows on individual reproduc- Table 4
tion cycles, the calving interval, the length of the lactation Input parameters for calculating health, other and fixed
period and the modified Wood production function (Fox et costs
al., 1990) were taken into consideration in the bio-economic Variable (unit) Value
model. Revenues from slaughtered animals were a function Price of semen for artificial insemination (€ per insemi- 8
of the live weight at slaughter, the dressing percentage and nation dose)
the average price per kg of carcass weight, defined on the Average number of inseminations per heifer/cow 5/6
basis of the distribution of carcasses across fleshiness and Number of reinseminations 1
fat-covering classes within the SEUROP grading system Costs for veterinary care1 per cows (€ per animal and 85
(Table 3). Moreover, direct subsidies paid in relation to dairy reproductive cycle)
herd were included in the revenues. The average value of Costs for dystocia2 – calving score 3/calving score 4 (€ 39.7/79.9
per calving)
individual subsidy payments for the period of 2011 to 2013
Costs for water (€ per d) 0.1
was used (Krupová et al., 2016). The input parameters for
Cost for straw for bedding for cows (€ per d) 0.06
the calculation of revenues are listed in Table 3.
Fixed costs3 (€ per animal and d)
Table 3 Cows 2.8
Input parameters for calculating other revenues Reared calves 0.81
Breeding heifers 1.14
Variable (unit) Value 1
Included are costs for veterinary fees, drugs, dystocia, mastitis and claw
Average price by weight (€ per kg of live weight) disease. 2Four score are used for calving performance: easy calving with-
Calves1 2.4 out help (1), easy calving with help (2), difficult calving with veterinary
assistance (3), calving with caesarean section (4). 3Included are costs
Heifers1 1.3
for labour, energy, fuels, repairs, insurance, interest on investments and
Cows2 1.2 overhead costs
Average live weight (kg per animal)
The bio-economic model of the program EWDC (version
Calves 116
3.0.4) from the ECOWEIGHT 6.0.4 program package (Wolf
Heifers 515
et al., 2013) was used for all calculations.
Cows 597
Price for manure (€ per 100 kg) 0.03
Results and Discussion
Production of manure per cow (kg per d) 45
Direct subsidies3 Revenues and costs
Milk production (€ per kg of milk) 0.0117 Generally, variation in farm milk prices (Table 1) has
Livestock unit (€ per cow and year) 88.06 significant effects on dairy farm revenues (Nicholson and
Performance testing (€ per cow and year) 23.13 Stephenson, 2015). In our study, over the evaluated pricing
1
Price is given per kilogram of live weight of female and male calves upon systems, revenues from milk were found as the most impor-
weaning at age 100 d and per kilogram of live weight of heifers sold preg- tant item (85% on average without subsidies including) of
nant at 900 d of age. 2Price is given per kilogram of live weight for culled the revenues of the dairy Slovak Simmental population. This
cows. 3Average value of direct subsidies during 2011 to 2013. Subsidies
for performance testing included subsidies for all cattle categories in the
finding is consistent with the papers of Vargas et al. (2002),
herd (calves to 6 mo, cattle from 6 to 24 mo, and bulls and heifers up to 24 Krupová et al. (2009) and Kahi and Nitter (2004) where the
mo taken as 0.2, 0.6, and 1.0 livestock units, respectively) milk accounted for 83 to 95% of total incomes. In the last
186 Monika Michaličková*; Zuzana Krupová; Emil Krupa

cited paper, proportion of milk was found similar in spite of milk production, pregnancy and the activity of individual
the fact that the payment for milk was based on the volume animal categories and according to the average price per ki-
of milk and do not considered its composition. As these au- logram of fresh matter in feeding rations with dry matter, net
thors stated (Kahi and Nitter, 2004), milk fat content should energy and protein contents. This approach was preferred by
not be omitted as a trait in the breeding objective even in the Kuipers (1999) because it is important to utilize production
case when milk components are not paid because of impact potential in relation to the given output level, i.e., the milk
on the feed costs. Moreover, milk production traits have tra- yield. Contrary to our results, e g., Kahi and Nitter (2004)
ditionally received a large emphasis in the national breeding observed the prevalence of variable costs in the calculation
programs of dairy and dual-purpose cattle in many countries (98%). This finding is related with the extensive low-input
e. g. (Wolfová et al., 2007; Komlósi et al., 2010; Hietala et farm system of dairy cattle, as well as with the different cat-
al., 2014). Proportion of milk revenues dropped in our study egorization of individual cost items.
to 78% (Figure 1) when considering the direct subsidies;
however these were omitted from calculation in above cited
papers. Taking into account the evaluated Slovak population,
the second most important part of revenue was that for sold
surplus calves, breeding pregnant heifers and for manure
(9%). This finding is consistent with Kahi and Nitter(2004)
as well as with the general goal of this breed, i.e. to farm a
productive dual-purpose (milk and meat; 60:40) cattle.

Fig. 2. Average structure of costs in dairy Slovak

Simmental farms
*Includes costs for clinical mastitis incidences and other veteri-
nary treatment (e.g., dystocia cost expressed per calving and cost
for removing and rendering dead animals). **Includes bedding,
i.e., costs for straw minus revenue for manure. ***Includes costs
for labour, energy, reparations, insurance, fuel, overhead and
depreciation of property
Fig. 1. Average structure of revenues in dairy farms of
Slovak Simmental Economics of cattle
* Revenues calculated from sold breeding heifers and manure. ** Considering the actual production and economic condi-
Average value of direct subsidies during 2011 to 2013. Subsidies
tions, the farming of Slovak Simmental dairy cattle operates
for performance testing included those for all cattle categories in
the herd (calves to 6 mo, cattle from 6 to 24 mo, and bulls and
with loss of 455 € per cow and year on average (include also
heifers up to 24 mo taken as 0.2, 0.6, and 1.0 livestock units, the subsidies and revenues from milk and other categories of
respectively) sold animals). The negative economic results ranged from
326 to 589 € when delivering the same milk quality to various
As expected, total costs per cow and year remained con- dairies (i.e., according to various pricing systems, Figure 3).
stant over the evaluated farm system. Based on the current Higher variability in the profit value (+63.8 to -792 €
production and economic situation, the fixed costs (54%) per cow and year) published by Chrastinová et al. (2011)
and feeding costs (38%) were found to be the most impor- was mainly due to differences in production and econom-
tant cost items of the overall profitability (Figure 2). In most ic indicators in the analysed herds. For example, the milk
of the studies presenting the economic results of dairy farms yield varied from 2.7 kg to 6.1 kg per feeding day, and costs
e. g. (Wolfová et al., 2007; Hietala et al., 2014), the price of ranged from 24 to 749 € per cow and year. In contrast, Wol-
pastures and meadows used for grazing of cattle is included fová et al. (2007) observed much positive economic result
in the feed costs along with the farm’s own and purchased for Czech Fleckvieh cattle varying from -103.8 to 174.6 €
feeds and litters. In the bio-economic model applied here and per cow and year (without including subsidies). In spite of
also in other studies (Hietala et al., 2014; Krupová et al., the comparable production parameters between the Slovak
2016), feeding costs were calculated on the basis of daily and Czech dairy population, lower penalties for milk fat and
energy and protein requirements for maintenance, growth, milk protein content (-0.3 € cents and -0.1 € cents per %
Economics of Dual-Purpose Dairy Cattle under Various Milk Pricing Systems 187

welfare) and also through the breeding process. In contrast,

the highest loss per cow and year calculated for farms sell-
ing the milk with pricing system C was based on two large
competitive disadvantages. Basic milk price was lower and
penalties for nonstandard milk were higher in comparison
with the rest of analysed payment systems. It is important
to mention that SCC is frequently used to determine quality
payments to dairy producers (Bujko et al., 2014). Generally,
the European Union requires that milk used for dairy prod-
ucts sold in its territory must have SCC under the 400 000
cells per mL. Based on this fact the SCC is checked daily by
Fig. 3. Economic result of farm based on the evaluated farmer during milking period and this trait is also included
pricing systems in the breeding goals and selection schemes of many dairy
* Revenues calculated from milk, breeding heifers, slaughtered cattle breeds (Zavadilová et al., 2011). Altogether, SCC is
cows and sold manure used to the monitor the health status (mastitis incidence) of
the herd (Kahi and Nitter, 2004; Zavadilová et al., 2011).
of fat and protein content in kg of milk, respectively) were
Finally, it can be stated that the profitability of dairy farms
paid according to the payment system applied in their study.
was very sensitive to the payment system before the milk
Moreover, the reduction of milk price for nonstandard milk
crisis in 2009 (Vargas et al., 2002), and this remains true.
was not as strictly compared to our study (6.5 vs. 7.5 € cents
Likewise, as reported Wolfová et al. (2007), the importance
per kg of milk), and bonuses for the amount of milk deliv-
of fat and protein content, as well as udder health traits is
ered from each farm to dairies were taken into consideration
higher when greater emphasis on milk components and the
in their study. In accordance with our results, Vargas et al.
strict definition of qualitative parameter in the milk pricing
(2002) stated that the economic results of a dairy farm are
system is applied.
strongly dependent on the pricing system and breed and are
The results of this study fully confirmed that the milk
independent of quota. The abolition of milk quotas in 2015
has played a minimal role in our study as well because the pricing system in addition to production conditions is one
quota has not been filled (85% on average) in the Slovak of the key parameters determining the profitability and thus
conditions; therefore, they were not incorporated into the sustainability of dairy farms. From farmers’ point of view,
calculation. one option to improve milk prices is to focus on the milk
The ratio of the minimum to the maximum economic re- components for which adequate bonuses are paid. However,
sults over evaluated pricing systems was 81% (-589 € and orientation of farmers towards the higher milk and protein
-326 € per cow and year for C and B pricing systems, respec- content should be strongly individual depending on motiva-
tively). This ratio is related with the average parameters of tion from dairies as well farm production and economic con-
evaluated Slovak Simmental population where the fat, pro- ditions. The variability of the evaluated milk pricing system
tein and SCC content reached 4%, 3.4% and 472 300 cells can also influence the motivation of farmers to improve the
per mL, respectively. milk yield per cow and/or the content of milk components
Based on the population characteristics, the average val- and the milk quality. There are many solutions to provide
ue of protein content in kg of milk was already in the bonus improvements, e.g., through farm management organization,
payment area for all pricing systems. Moreover, the same motivation system and utilisation of resources (i.e., welfare),
was true for the fat content in pricing systems B and C. The the breeding process not excluding. Moreover, somatic cells
comparative advantage of the farm producing under the pric- content is highly important in the health security of milk pro-
ing system B was based on a characteristic of the given dairy duction. Results founded in this study provide pilot informa-
factory. It is primarily focused on products with higher added tion to revaluate the breeding goals for the local dairy cattle
value (e.g., cheese, cottage cheese and acidophilic products), population in the near future.
which is reflected in the higher basic milk price and bonuses
paid per milk components. Therefore, farmers selling milk to Acknowledgements
such dairies have a motivation to improve the milk yield per The authors would like to thank dairy cattle farmers for
cow as well as the content of milk components. One way to providing production and economic data, as well as to Jozef
provide this is through the overall farming conditions (i.e., Bujko, from The Slovak University of Agriculture in Nitra
188 Monika Michaličková*; Zuzana Krupová; Emil Krupa

for his helpful comments and English Language Editing Krupová, Z., J. Huba, J. Daňo, E. Krupa, M. Oravcová and D.
for editing the text. This study was funded by the project Peškovičová, 2009. Economic weights of production and func-
QJ1510217. tional traits in dairy cattle under a direct subsidy regime. Czech
Journal of Animal Science, 54: 249-259.
Krupová, Z., E. Krupa, M. Michaličková, M. Wolfová and R.
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Received October, 13, 2016; accepted for printing March, 10, 2017