Dairy profits forecast to fall by more than two-thirds

Profits among the dairy farms covered by a new report reached 12.43p per litre in 2025/26, but are forecast to fall by more than two-thirds as milk prices weaken and costs rise.

The annual Milk Cost of Production report from Old Mill accountants and the Farm Consultancy Group recorded average income of 54.81p per litre against production costs of 42.38p in the year to 31 March 2026. Profits are expected to drop to just 3.96p per litre in 2026/27.

Some producers could also face substantial income tax bills in January 2027, calculated on earnings from the much stronger previous milk year.

The headline figures mask wide differences between farms and no longer reflect the tougher conditions now facing many producers. Milk prices have fallen sharply, while drought and forage shortages have added to production pressures.

Bradley Causey, rural accountant at Old Mill, said spring-calving herds appeared well suited to the market conditions of 2025/26, when milk prices were stronger during the first half of the year.

He said: “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.”

Average milk income rose to 46.38p per litre, while non-milk income from calf and cow sales increased to 8.43p. However, every major input cost was above the five-year average.

Purchased feed was a significant contributor to higher costs during 2025/26, with a strong milk-to-feed-price ratio encouraging farmers to pursue additional yield despite forage shortages. Over the longer five-year period, rising labour costs were the main driver behind the increased cost of carrying out farm work.

The analysis found that neither milk yield nor herd size reliably predicted profit per litre. Larger or higher-yielding herds were not automatically more profitable.

Mr Causey said: “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.”

The strongest-performing farms combined lower costs with better technical performance and higher income. No single dairy system clearly dominated the most profitable group.

The top 10% generated total income of 60.87p per litre, compared with 50.19p among the bottom 10%. Their costs were also much lower, at 36.56p per litre against 52.75p.

This left the strongest performers with profits of 24.31p per litre, while the bottom group recorded a loss of 2.56p.

Allaster Dallas, a consultant at the Farm Consultancy Group, said: “The top 10% are achieving the same milk production at a lower cost.”

He said management decisions, processor requirements and longer-term planning would become increasingly important as trading conditions changed.

“It is not enough to focus solely on production, as cost structure can be key to success,” he added.

The report also warned that milk-price volatility was not the only source of concern. Producers face growing compliance demands, political uncertainty and wider economic fragility.

However, investment in energy-saving technology and improved genetics is beginning to deliver efficiency and financial benefits on some farms. Sales of dairy and beef animals are also helping businesses diversify their income and reduce exposure to the milk market.

Mr Dallas said: “There is some light at the end of the tunnel, and the UK remains a competitive place to produce milk.”

Farmers are being urged to review costs, cash flow and tax liabilities as margins weaken, particularly where January 2027 payments will be based on the stronger 2025/26 results.