How focus on ‘cost of doing work’ lifts dairy efficiency

Steep milk price cuts after better returns in the first half of the current milk year mean budgeting, cost management and cashflow forecasting need extra attention.

Many dairy businesses, especially all-year-round and spring-calving herds, nevertheless will be more profitable in the year ending March 2026, on the back of those earlier stronger milk prices.

There are assessments and decisions to be made about investment and cost structures, in some cases before the end of the tax year, which for most milk producers is also their accounting year-end.

See also: Outlook 2026: dairy sector to see continued price pressure

Gerard Finnan of the Farm Consultancy Group (FCG) suggests that more effort should be put into assessing the “cost of doing work” (CODW) on many dairy farms, where traditionally the focus has been more on the technical cost aspects of milk production, in particular feeding and feed costs.

CODW is the total cost of labour, machinery and labour contracting, machinery running and depreciation costs, electricity and other power costs.

In essence it is the combined cost of moving stuff about on a dairy farm, expressed on a per litre basis, says Gerard.

“Labour costs cannot be benchmarked in isolation as some producers use more contractors and have less machinery.

“Producers are tending to use more technology, which needs maintenance and depreciates, to replace a lack of skilled labour. CODW is a much more accurate KPI combining all these interacting costs.”

While concentrate feed costs are generally as low as they have been in five years or so, the CODW is rising rapidly.

This is particularly the case with the capital and running costs of machinery and equipment, alongside higher wage rates and National Insurance costs.

“We tend to find that the farms with the lower CODW have overall lower costs of production most of the time,” says Gerard.

Businesses which successfully controlled power, machinery and labour costs made the most of rising milk prices in 2024-25.

“Dairy farmers are very good technically but often some don’t have the skills to manage machinery and labour,” he says. “This is not a criticism as dairy farming is a complex, multi-skilled operation.”

Together with accountant Old Mill, FCG produces an annual milk cost of production report.

This, for the milk year ended 31 March 2025, showed that elements making up the CODW figure are becoming increasingly key, compared with the past when feed and variable costs may have been the focus, says Bradley Causey, rural adviser at Old Mill.

30% rise in three years

CODW increased by 30% in three years in the herds costed for the report, representing an average £134,000 increase.

While electricity prices have doubled, this is a small component of the overall increase, says Gerard.

“Labour costs have increased significantly, with an average annual rise of 6.3%.

“However, power and machinery have increased by 39% in three years, indicating farmers’ response to labour availability is to mechanise their systems more, whether it be robots, cow activity sensors or using more contractors, which is indirectly hiring labour with machinery.” 

Wide range of costs

The significance of the CODW element is highlighted by the large range it covers.

“This varies from 12p-30p/litre, which is massive,” says Gerard.

“We can all relate to feeding livestock in terms of rates and price per tonne and analysing silages and measuring grass, but how much time do we spend managing the CODW budget which, at £460,000, is a third bigger than the average feed budget for the average herd in this dataset,” says Gerard.

“It’s a lot cheaper to improve efficiency from existing output than to try and expand a business that is not running as efficiently as it could.”

One farmer he advises manages to keep the cost of doing work down to about 12-13p/litre, just two thirds of the average rate.

This is achieved not only by a methodical approach to staff training and machinery maintenance, but also planned second-hand and new machinery purchases driven by need and not for tax saving reasons, says Gerard.

Proper induction, daily checks on kit and an ethos of looking after equipment are also all part of the business culture in caring for the machinery. 

Beware of depreciation burden

The higher milk prices coupled with the cost-effective increased milk output in the first half of the milk year, plus higher livestock prices, will lead to profits and tax bills for many in the year ending 31 March 2026.

This will prompt some to invest in machinery or other equipment, for example a new tractor, to benefit from 100% capital allowances and a reduced tax bill.

However, this can be a false economy, says Gerard, because of the heavy depreciation and short term HP repayment burden this brings at a time of rapidly falling milk prices. 

It’s also a question of efficient use of machinery and equipment, he says.

Investments can sometimes be justified partly by the fact that good up-to-date kit may help retain staff, or investment in additional kit such as a slurry tanker which can make more efficient use of a tractor and help with timely on-farm weather driven operations.

However, if staff leave and those who replace them are not as skilled, this can lead to poor use and under-use of kit, making the investment inefficient.

“Labour can leave, but the HP payments still have to be made – in the worst case, the purchased kit sits there and a contractor is called in.”

Investment can also be prompted by a lack of skilled labour – milking robotics can be an example of this, he says. 

CODW in different milk production systems

Allaster Dallas, a farm consultant with FCG, says CODW is likely to have more bearing on business profitability in the future than margin over purchased feed.

He has analysed this cost base for different dairy systems and says that for spring calvers, CODW has risen 34% in three years, to average 22.18p/litre in 2024-25.

Autumn calvers have seen a lower rate of increase, up by 18% to average 19.18p/litre, while for all-year-round calvers the increase is just 2% to 14.75p/litre.

“The all-year-round herds tend to be indoors, and aiming for higher litres,” says Allaster.

“This is a reflection that the cost of doing work is already relatively high in these herds, and they have been able to dilute/absorb the costs through cheaper feed on a pence per litre basis, and therefore, CODW has impacted seasonal calving herds more.”

It is difficult for some smaller herds to achieve a lower CODW because of scale and the need for certain kit basics.