Analysis: Milk price crash tests dairy resilience

With farmgate milk prices down by more than a quarter since the autumn, dairy producers are dealing with a margin squeeze few producers have experienced at this pace.

Since October, conventional farmgate prices have fallen by an average of 27%, according to dairy analyst Chris Walkland, with some processors cutting prices by more than 10p/litre in just a few months.

“There’s been a huge drop-off,” says Mr Walkland. “On average it’s between 25% and 30% – the biggest and quickest price drop on record.”

See also: Dairy farmers losing thousands as price collapse bites

The scale and speed of the decline are unprecedented, even for a sector familiar with volatility.

For dairy farmers, the impact on cashflow is immediate – fixed costs remain high, ongoing investment commitments continue, and milk is now often below the cost of production for farmers who are not on retail contracts, or organic.

NFU Dairy Board chairman Paul Tompkins warns that the downturn is “killing” margins, with some producers reporting losses of hundreds or even thousands of pounds a day as prices retreat sharply from 2025 highs.

Mr Tompkins, a third-generation dairy farmer managing his family’s 234ha farm in the Vale of York with a 500-head Holstein herd, said he personally lost £1,800 a day in January, as production costs of about 40p/litre far exceeded returns of 29p/litre.

“Margins are being squeezed hard. Even efficient farms are feeling the pinch,” he says.

Commodity slump feeds through

The correction has been driven largely by global commodity markets. Cream and butter prices have dropped sharply, cheddar values have eased, and skimmed milk powder has remained weak for months, although is improving now.

Oversupply has compounded the situation. Processing capacity was full last year, and a strong spring flush is expected to test plant limits once again.

Non-aligned manufacturing contracts have been hit hardest, while some retailer-aligned liquid milk pools remain on higher, cost-of-production-based prices.

The gap between the highest aligned contracts (worth about 45p/litre) and the lowest non-aligned agreements can now be as much as 16p/litre.

“It’s only the non-aligned pools that have seen the crash,” Mr Walkland says.

Cashflow pressure building

Many farms enjoyed stronger milk cheques through late 2025, but the steepest cuts are only now feeding through.

“Many dairy farmers have probably had one or two really bad milk cheques so far,” Mr Walkland says. “They won’t be starting to haemorrhage cash just yet. Nevertheless, concern is building.”

Rapid price corrections make it harder for businesses to adjust spending, defer investment, or renegotiate finance arrangements.

Margins in dairy are inherently volatile, but analysts and industry leaders warn that volatility has intensified over the past decade.

“The volatility is getting enormous,” says Mr Tompkins. “We don’t want to see a yo-yo effect at the farm and on the shelf.”

According to AHDB figures, there were an estimated 7,010 dairy producers in Great Britain as of October 2025 – a 2.6% year-on-year decline that underlines continued consolidation in the sector.

Producer numbers are now at record lows, having fallen by about 85% since 1980. Over the same period, however, average output for each farm has increased significantly, with typical annual production now standing at approximately 1.7m litres.

Prolonged low prices increase the risk of more farmers leaving the industry, particularly those carrying high levels of borrowing, recent expansion costs or significant exposure to manufacturing markets.

Retail price lag

Some scrutiny has fallen on supermarket shelf milk prices, but Mr Walkland cautions that direct comparisons with the four-pint bottle – retailing at about £1.65 – can be misleading.

This is because retailers continue to pay higher prices to aligned suppliers under cost-of-production models.

Historically, AHDB analysis suggests retail price changes can take several months to filter through, and farmgate contracts typically lag behind wholesale shifts.

“What is more crucial is what happens to butter and cheese as we have to shift the milk out of stocks,” he says. “We don’t want butter, cheese or skimmed milk powder stocks to grow. If they grow, there will be an even longer downturn.”

Boosting demand across dairy categories could help relieve downward pressure on farmgate prices.

Mr Walkland warns that unless retailers introduce meaningful promotions on products such as butter and mild cheddar, they risk being accused of profiteering while farmers’ returns continue to fall.

Contracts and transparency

Recent dairy contract regulations aim to improve fairness and transparency, but producers must scrutinise their own agreements carefully, Mr Tompkins advises.

“I bet not many dairy farmers have gone and had a look at their milk price schedule. Does it clearly state how your price is made up?” he says.

Understanding exposure to commodity markets, review periods, and pricing mechanisms will be crucial if volatility remains elevated.

“The bottle of milk on a supermarket shelf has a cost-of-production model behind it. It’s more complicated than saying: the shelf price is this and the farmgate price is that,” he adds.

How long will downturn last?

The outlook remains uncertain, dependent on global supply, export demand, and UK production volumes.

“I can’t see any major increase until quarter three or four – provided milk volumes tighten,” says Mr Walkland. “We’re in for the long haul on this one. But I don’t think it will be years – I think it will be this year.”

He urges producers to prepare for a financially testing period. While many businesses are in a stronger position than in previous slumps, sustained low prices will test even the most efficient operators.

Against this backdrop, Matt Ryan, chief commercial officer at Oxbury Bank, says dairy farmers must focus on resilience rather than panic.

“Milk prices are going to fluctuate, so this is not unexpected,” he says, pointing to a clear divide between those on supermarket-aligned liquid contracts and producers exposed to more volatile commodity markets.

Financial discipline

Mr Ryan’s key message is to keep a firm grip on the numbers. “The businesses that are going to do the best are the ones with a good, solid, basic grip on their financials,” he says.

Scale, spreading fixed costs and understanding cashflow remain critical, he adds.

Producers should also pull practical levers, Mr Ryan says.

With beef prices strong, farmers may be looking at their culling policy to generate cash and help absorb some costs whilst potentially strengthening their herds genetics in the long term.

Adjusting replacement rates, using existing cash reserves, and deferring non-essential capital projects for 12 months are all possible steps.

“It’s all about buying time,” he says. “Whilst we are very conscious of the short-term outlook and the potential stress some farmers may be under – the long-term outlook of dairy prices is still very strong.”

After a period of relative stability and strong returns, the dairy sector has been reminded that volatility is now the norm.

In the months ahead, businesses that actively manage volatility, fully understand their contracts and cost of production, and maintain tight control of cashflow will be best placed to withstand the squeeze.