Selection on the Major Components of Milk: Alternative Methods of Deriving Economic Weights

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Abstract
Selection indexes for milk components in the published literature have been derived from economic weights that suffered from several inadequacies: 1) they failed to include the majority of costs, 2) they were based on payment systems without first demonstrating long-term stability, 3) they employed average, not marginal, costs and returns, and 4) they used no rescaling to allow for alternative methods of increasing outputs. Alternative methods of deriving economic weights are presented for both a free market and a protected market. The various methods are used to derive economic weights for the major components of milk (fat, protein, and lactose) in the Canadian dairy industry. Different methods produce widely different absolute and relative economic weights. The inclusion of all costs and rescaling to fixed output appear to be important. If an existing protected market for dairy products has long-term stability, the relationship between production and returns is discontinuous. This is because once the internal market is satisfied, excess production is sold to external markets at a markedly lower, sometimes negative price. In this case the use of marginal as opposed to average costs and returns is important, particularly for fat and protein. The information gained in a rational approach to defining economic weights could be used in defining future payment systems that would promote breeding objectives at the farm level, which would be sensible for the industry as a whole.