Dairy profitability under pressure as costs outpace milk prices

A new report from Old Mill and the Farm Consultancy Group suggests that while many dairy businesses enjoyed a profitable 2025/26, the sector now faces renewed financial pressure as milk prices fall and production costs continue to rise.

The latest Milk Cost of Production report paints a picture of two very different realities. Historic figures from the year ending 31 March 2026 show strong profitability across much of the sector, but current market conditions are considerably less favourable, with many producers now receiving a milk price below the cost of production.

During 2025/26, the average cost of producing a litre of milk stood at 42.38p, while the average milk price reached 46.38p/litre. Additional income from the sale of cows and calves increased total returns to 54.81p/litre, resulting in average profits of 12.43p/litre – more than double the five-year average.

However, overall averages conceal significant variation between businesses. The most efficient producers were able to capitalise on stronger milk prices and maintain tight control of costs, while others struggled. The lowest-performing 10% of businesses recorded losses of 2.56p/litre, demonstrating the financial pressures still present within the industry.

Recent data also points to continued structural change within the dairy sector. Defra figures show the number of dairy producers has fallen below 7,000 for the first time, following the loss of 160 herds between October 2025 and April 2026. At the same time, milk output has started to ease and more producers are selling cows from their herds.

“Many in the industry are increasingly concerned for the future and feel squeezed on multiple fronts,” warns Bradley Causey, rural accountant at Old Mill, part of the national Kinbrook Group. This is not just due to volatile milk prices, but also increasing compliance requirements, lack of trust in politicians, and wider economic fragility. “Business confidence in the UK is not high overall, and farmers are very much part of the wider UK economy.”

The report forecasts further pressure ahead. Milk prices are expected to average 39p/litre during 2026/27, while production costs are projected to rise to 43.54p/litre, driven by increases in feed, labour and energy expenses. For some farmers, a sizeable Income Tax bill due in January 2027 could add to those challenges, reflecting the stronger profitability achieved during the previous milk year.

While margins remain under pressure, improved access to business data is helping many producers respond more quickly to changing conditions.

“However, the speed at which information can be gathered is helping businesses to make decisions more quickly and implement changes to underperforming elements across the entire farming structure,” notes Allaster Dallas, a consultant at the Farm Consultancy Group.

Investment is also beginning to deliver tangible results. Many dairy businesses have focused on technologies that lower energy consumption, enhance herd genetics and improve operational efficiency. Others are broadening revenue streams through the sale of dairy and beef animals, helping to reduce reliance on milk income alone.

The report suggests this trend could become increasingly important as economic pressures continue across the wider livestock sector.

“The beef sector is already creaking under rising input costs, and any further feed price increases may drive more producers to let others take the risk of livestock ownership,” says Mr Dallas.

Despite the challenges identified, the report concludes that the sector remains resilient. UK dairy farming continues to benefit from efficient production systems, a supportive consumer market and processors capable of adapting to changing demand.

“A lot has happened in a short space of time, and the fact that the farmers are here to tell the tale is a testament to their resilience. There is now some light at the end of the tunnel, and the UK remains a competitive place to produce milk, with processors meeting the needs of a generally supportive customer base,” he adds. “Hopefully, this report will inspire producers to review their costings and implement practical changes to maintain profitability.”

This year’s findings underline the importance of understanding cost structures, monitoring performance closely and remaining agile in the face of changing market conditions. While recent profitability has provided some businesses with a financial buffer, the ability to adapt will be critical as the sector navigates another period of uncertainty.

With milk prices under pressure and production costs continuing to rise, having a clear understanding of your numbers has never been more important. Old Mill’s rural specialists work alongside farming businesses to benchmark performance, identify opportunities to improve profitability and help build resilience for the future.

To discuss your dairy business and explore practical ways to strengthen financial performance, contact Bradley Causey in our rural team today or your usual Old Mill adviser.