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Background  Breeders and geneticists use statistical models to separate genetic and environmental effects on phenotype. A common way to separate these effects is to model a descriptor of an environment, a contemporary group or herd, and account for genetic relationship between animals across environments. However, separating the genetic and environmental effects in smallholder systems is challenging due to small herd sizes and weak genetic connectedness across herds. We hypothesised that accounting for spatial relationships between nearby herds can improve genetic evaluation in smallholder systems. Furthermore, geographically referenced environmental covariates are increasingly available and could model underlying sources of spatial relationships. The objective of this study was therefore, to evaluate the potential of spatial modelling to improve genetic evaluation in dairy cattle smallholder systems.    Methods  We performed simulations and real dairy cattle data analysis to test our hypothesis. We modelled environmental variation by estimating herd and spatial effects. Herd effects were considered independent, whereas spatial effects had distance-based covariance between herds. We compared these models using pedigree or genomic data.    Results  The results show that in smallholder systems (i) standard models do not separate genetic and environmental effects accurately, (ii) spatial modelling increases the accuracy of genetic evaluation for phenotyped and non-phenotyped animals, (iii) environmental covariates do not substantially improve the accuracy of genetic evaluation beyond simple distance-based relationships between herds, (iv) the benefit of spatial modelling was largest when separating the genetic and environmental effects was challenging, and (v) spatial modelling was beneficial when using either pedigree or genomic data.    Conclusions  We have demonstrated the potential of spatial modelling to improve genetic evaluation in smallholder systems. This improvement is driven by establishing environmental connectedness between herds, which enhances separation of genetic and environmental effects. We suggest routine spatial modelling in genetic evaluations, particularly for smallholder systems. Spatial modelling could also have a major impact in studies of human and wild populations.

Spatial modelling improves genetic evaluation in smallholder breeding programs