Dairy profits mask huge volatility

The financial year ended 31 March 2026 was a stronger one for some UK dairy farmers, but the situation now is very different, with a significant drop in milk price alongside drought conditions. Alongside this, January 2027 may bring a large tax bill, according to the annual Milk Cost of Production report by Old Mill accountants and the Farm Consultancy Group.

Headline figures show that the cost of production averaged 42.38p/litre against a total income of 54.81p/litre, boosting profits to 12.43p/litre – more than double the five-year average. However, this masks considerable variability between farms and systems and doesn’t reflect the current reality of sharply lower milk prices and extreme weather challenges.

“Spring calving systems may have been best suited to the market conditions of 2025/26 given the higher milk price in the first half of 2025,” explains Bradley Causey, rural accountant at Old Mill, part of the national Kinbrook Group. “Interestingly, we may see a reversal of this in 2026/27, with spring calvers possibly being least suited to the financial environment given the lower milk price this spring.”

Input costs

The report shows milk income rose to 46.38p/litre, while non-milk income (from calf and cow sales) rose to 8.43p/litre. However, all input costs increased against the five-year average, driven particularly by purchased feed. This is likely because the milk-to-feed-price ratio was extremely strong, encouraging farmers to feed for yield at a time of forage shortages.

The figures also reveal that there is no correlation between milk yield and profit. “Extra litres can be expensive to produce, and it may be that controlling cost and hitting a profitable level of production is the better option,” says Mr Causey.

Comparing the top and bottom 10% in terms of profit sees no clear definition between dairy systems; but technical performance and cost controls are key. “The top 10% are achieving the same milk production at a lower cost,” says Allaster Dallas, a consultant at the Farm Consultancy Group.

They are also commanding over 10p/litre more for their milk, bringing total income to 60.87p/litre against 50.19p/litre in the bottom 10%. Total costs came to 36.56p/litre versus 52.75p/litre, making for profits of 24.31p/litre against a loss of 2.56p/litre in the bottom 10%.

Processor requirements

“Farm management, and not just external market conditions, is important,” notes Mr Dallas. “It is not enough to focus solely on production, as cost structure can be key to success. Meeting the requirements of the processors and contracts will become more important in the future, as well as more communication about where your business will be in 12 months or even five years.”

Looking ahead, 2026/27 is likely to see a massive drop in profits, to 3.96p/litre, driven by sharply lower milk prices and higher production costs. At the same time, producers could face a high Income Tax bill in January 2027, from the 2025/26 milk year. “Some in the industry may be concerned for the future,” warns Mr Causey. This is not just due to volatile milk prices, but also increasing compliance requirements, political uncertainty and wider economic fragility.

However, producers who have invested in technology; particularly to reduce energy costs and improve genetics, are starting to yield rewards in both efficiency and cash, says Mr Dallas. Many producers are also selling dairy and beef animals to supplement their income and insulate against milk market volatility.

“There is some light at the end of the tunnel, and the UK remains a competitive place to produce milk,” he adds. “Hopefully, this report will inspire producers to review their costings and implement practical changes to maintain profitability. Ask yourself: What do we do well, and what can we do better?”