Cost–price models were developed to describe milk collection, manufacture and marketing of standardised fluid milk, butter, cheese, casein, and milk powders. Market constraints were modelled by fixing fluid milk demand to 10% or 70% of milk production. Milks representative of New Zealand Holstein-Friesian (HF) and Jersey (J) breeds, and novel technologies were considered. The true value of each milk was assessed from its own processing performance on the basis of fat, protein, lactose and volume considerations. Average milk was worth £0.193/kg when a significant fluid market exists, reducing to £0.112/kg when most milk was manufactured into concentrated dairy products for sale on the world market. Milk from different breeds varied in true value. On a per kilogram basis, HF milk was less valuable than J milk.

Single and multiple component payment systems were quantified for various subsets of milk components and used to obtain predicted values of a range of milks for comparison to their true values. Values of milks that differ in composition from average milk tend to have predicted values that deviate from their true value. The extent of such bias varies depending upon the payment system considered. For example, volume-based payment over-valued HF milk and penalised J milk. Other payment systems undervalued HF milk and over–valued J milk.

Payment systems should be fair, discourage unfavourable changes in composition and provide opportunities for shifts towards the production of more valuable milk. The marketing mix and the choice of payment system have major impact on the potential for economic benefits to the producer from modifying the composition of milk. Payment systems need careful, thorough investigation in concert with market research and studies into breeding and other management opportunities for modifying milk composition.

A value-based payment system can encourage producers to alter the composition of their milk in order to increase revenue.